<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
-----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to _________________
Commission file number 0-11663
Chancellor Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2626079
--------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
745 Atlantic Avenue, Boston, Massachusetts 02111
- ---------------------------------------------- ----------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (617) 728-8500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
-------------------
which registered
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None ________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
----------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
reg-istrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1996: $796,169.
Number of shares of registrant's Common Stock par value $.01 outstanding as of
February 26, 1996: 5,136,391.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Proxy Statement for the Annual Meeting of Stockholders to be held June 6, 1996 -
Part III
<PAGE>
PART I
ITEM 1. BUSINESS.
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Chancellor Corporation ("Chancellor" or the "Company") originates equipment
lease transactions directly with equipment users and sells those transactions to
investors. The Company also manages most of the leases it sells to investors
and, when the original leases expire or terminate, remarkets the equipment for
the benefit of the investors and the Company. The Company originates leases
involving primarily transportation equipment, but also other equipment including
material handling equipment and construction equipment. Investors who purchase
equipment subject to a lease receive the tax and most of the economic benefits
associated with the lease transaction. In certain cases, the Company has
retained leases for its own account. The Company also arranges non-recourse
financing for some of the leases which it sells and for most leases which it has
retained for its own account. Typically, when the Company originates leases, the
investors or buyers of those leases are not known. Therefore, the Company at the
time of entering into the lease transaction is "underwriting" the lease. At the
expiration or early termination of the original lease, the Company typically
sells or releases the equipment on behalf of the investor.
A discussion of the Company's continuing efforts to address its need for
capital is included below in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." The
following three paragraphs summarize this process.
In 1993, following an announcement by Bruncor Inc. ("Bruncor"), the
Company's former majority owner, that it would write off its investment and
actively seek to withdraw from its relationship with the Company, the Company
retained investment advisors to assist in identifying capital and financing
alternatives. The Company ultimately entered into a Recapitalization and Stock
Purchase Agreement ("Recapitalization Agreement") with Vestex Corporation
("Vestex"), a private financial services and venture capital firm, in September
1994. Pursuant to the Recapitalization Agreement, Vestex would, among other
things, acquire Bruncor's controlling interest in the Company and 5,000,000
shares of a newly-created series of convertible preferred stock ("Preferred
Stock") and would infuse $2,500,000 of equity capital into the Company (the
"Recapitalization"), subject to the approval of the Company's stockholders,
which was obtained on January 20, 1995. Although Vestex paid a $75,000
non-refundable deposit for the Company's and Bruncor's agreement to extend the
Recapitalization closing date until March 31, 1995, it failed to close the
transaction. During April and May 1995, Bruncor and the Company reassessed the
Company's capitalization and strategic alternatives. Following further
negotiations with Vestex, on July 25, 1995, Vestex, Bruncor and the Company
entered into an amendment to the Recapitalization Agreement pursuant to which
Bruncor sold all of its Common Stock in the Company to Vestex and the Company,
which in turn awarded Common Stock to its employees. Vestex acquired a 31%
interest in the Company and the employees acquired a 20% interest. In exchange,
Bruncor received $750,000 from the Company, $400,000 of which was paid to the
Company by Vestex, $142,000 of which was derived from loans to the Company by
certain members of its senior lender group, $8,000 of which was paid to Bruncor
as closing expense reimbursement from the Company's working capital, and
$200,000 of which is represented by a subordinated note. In addition to the sale
of its majority position, Bruncor also repaid the Company's $3,700,000 loan to a
lender which Bruncor had guaranteed and forgave $720,000 of accrued interest on
the loan which Bruncor had paid the lender. As a result of these
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<PAGE>
transactions, the Company's stockholders' equity increased by approximately
$4,000,000.
As part of the transaction, Vestex agreed to infuse $2,025,000 of new
capital into the Company in exchange for 5,000,000 shares of the Preferred Stock
in three installments through December 1995, after which Vestex was to have
become the Company's controlling stockholder. Vestex, however, failed to pay the
first installment due on September 15, 1995 and, following the expiration of
Vestex's ten-day cure period on September 26, 1995, the Company declared Vestex
in default and canceled the Recapitalization Agreement as amended. As a result
of Vestex's default, Stephen G. Morison, the Company's President and Chief
Executive Officer, assumed the right to direct the voting of Vestex's 1,600,000
shares of Common Stock pursuant to an Interim Voting Agreement among Vestex,
Mr. Morison and certain other parties.
The Company's Board and management continue to believe that the Company
requires new equity capital in order to resume a strategy of portfolio
investment which it had successfully pursued during the late 1980's as well as
to invest in certain remarketing and other business operations. In light of
Vestex's default under the Recapitalization Agreement as amended, the Board is
actively pursuing raising equity through private investors, including a possible
restructured preferred stock transaction involving Vestex.
The Company was incorporated in Massachusetts in 1977 and operates in a
single business segment.
ORIGINATION OF ORIGINAL EQUIPMENT LEASES.
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Lease Origination. The Company originates leasing transactions through
-----------------
direct solicitation of equipment users. The Company's sales force identifies a
prospective lessee and negotiates a lease for certain equipment with the lessee.
The Company then purchases the equipment, sometimes financing a portion of the
purchase price through non-recourse debt. The Company provides various lease
management services for most of the leases it originates, including lease, loan
and investor documentation and servicing, motor vehicle titling, billing,
insurance monitoring, and accounting and administrative support.
Equipment. The Company concentrates on leasing transportation equipment,
---------
such as tractors, trailers and trucks ("Fleet equipment"). The Company also
leases construction equipment, aircraft, material handling equipment and other
equipment. During 1995, the Company entered into approximately 56 new lease
transactions involving equipment having an original equipment cost of
approximately $27 million, versus 19 transactions involving equipment having an
original cost of $14 million in 1994. Substantially all of these transactions
involved Fleet equipment. Equipment acquired by the Company is usually selected
by the lessee. Because the Company normally does not control directly the
selection of equipment, it purchases equipment from a wide variety of
manufacturers. The Company is not dependent on any one or more equipment
suppliers.
Lessees. Although the Company's direct solicitation efforts involving
-------
leases of new equipment have shifted from Fortune 1000 companies to include
smaller business entities, most of the Company's lessees of new equipment are
still of substantial creditworthiness, with net worths in excess of $50 million.
During
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<PAGE>
1995, the three largest lessees accounted for 24% (ConAgra, Inc.), 17% (Shamrock
Foods, Inc.) and 16% (Intrenet, Inc.) of the new lease transactions originated
by the Company. These lessees are unaffiliated with the Company and enter into
lease transactions with the Company on the basis of competitive bidding.
Equipment Cost Financing. The Company normally finances its purchase of
------------------------
equipment through a short-term, secured inventory ("warehouse") line of credit
or through vendor financing programs. The Company's primary warehouse line of
credit is provided by its senior lender group under the intercreditor agreement
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity Capital Resources." Loans under this line of
credit bear interest at prime plus 2%, and provide advances for the full
invoiced cost of equipment purchased with loan proceeds, are subject to the
lenders' approval of each lessee's credit and the satisfaction of certain
conditions precedent and documentation requirements, and are collateralized by
security interests in the related leases and equipment. Since June 1993, the
Company has supplemented its primary warehouse line with a non-recourse loan
facility with an asset-based lender headquartered in New York. This facility
permits the Company to finance new equipment in an amount equal to the sum of
the discounted rental stream for the equipment plus a certain amount of the
Company's expected residual interest in the equipment. The Company repays its
warehouse financing with the proceeds of sales of equipment to investors.
Virtually all of the Company's equipment sales are on "single investor" basis in
which the investor pays the entire equipment cost.
Competition. The equipment leasing business is highly competitive. The
-----------
Company's competitors include (1) large diversified financial services
companies, (2) other leasing companies, and (3) vendor financing programs. Many
of these organizations have greater financial resources than the Company and,
therefore, may be able to obtain funds or equipment on more favorable terms than
those available to the Company. Additionally, the Company competes against
other financing alternatives available to lessees for the purchase of equipment.
The principal methods by which the Company competes are its ability to
underwrite the lease transactions which it originates, its knowledge of the
equipment used by its lessees, the training and experience of its personnel, the
relationships and reputation it has established with lessees, equipment
suppliers and financial institutions, its ability to adapt to changing
regulations and tax laws, and its experience in successfully remarketing the
equipment at lease termination.
Lease Terms and Conditions. The Company writes "net" leases. A "net" lease
--------------------------
requires the lessee to (1) maintain and repair the equipment, (2) insure against
risk of loss and liability, and (3) pay all taxes associated with the equipment,
except on the Company's net income. The lessee is unconditionally obligated to
pay all rentals for the full lease term, except as noted in the following
paragraph.
Some of the leases written by the Company provide for early termination
options. Generally, these options may be exercised at specified times upon
receipt by the Company of an amount at least equal to the discounted present
value of remaining rent payments. The Company's policy is to collect all
termination payments. Other leases allow the lessee at certain times to require
the Company to attempt to sell or sublease the equipment for the lessee, with
the Company sharing in any losses or gains should a decrease or increase in
revenue streams occur as a result.
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<PAGE>
SALES TO INVESTORS.
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Sales. After the Company purchases and leases equipment to an end user,
-----
the lease transaction is sold to one or more investors. Investors typically
purchase lease transactions through the acquisition of an interest in a grantor
trust. The Company sells the lease transaction primarily through its own sales
staff and occasionally through referrals by third parties, such as financial
advisors and other intermediaries. Although most of the lease transactions which
the Company sells are single investor leases, the Company has the capacity to
sell leveraged leases in order to satisfy investor preferences.
In the grantor trust structure, the equipment is acquired directly by the
trust and the related lease is transferred to that trust. The Company or one of
its subsidiaries usually acts as trustee and in that capacity holds title to the
equipment and performs certain specified functions under the lease and loan
transactions. On a few occasions, rather than using a grantor trust, the
Company has sold equipment directly to an investor.
Tax Considerations. Investors in leases originated by the Company are
------------------
entitled to take deductions for depreciation and interest payments, if any. In
the early years of the lease, the tax deductions available to the owner may
exceed the rental income from the lease. The Company is aware of only a few
cases in which the Internal Revenue Service ("Service") has challenged the tax
benefits claimed under trusts arranged by the Company. The Company believes,
based on information from some investors which have been subjected to such
challenges, that the Service has in these cases ultimately accepted the
investors' claimed tax benefits under the trusts and is aware of no case in
which tax benefits claimed under a Company-sponsored trust have been
successfully challenged by the Service.
Customers. Sales of leasing transactions are made primarily to financial
---------
institutions and occasionally to other corporations or individuals. During
1995, the three largest customers accounted for approximately 41% (Integra
Business Credit Company), 15% (NationsBanc Leasing) and 12% (The CIT Group) of
all leases sold. These customers are banks or financial institutions which are
unaffiliated with the Company. The loss of any of these customers would not
likely be materially adverse to the business of the Company because of the
availability of similar offers from other institutions. However, a tax or
regulatory change effecting the banking industry could have a materially adverse
impact on the Company.
Lease Underwriting Income. There are two components of lease underwriting
-------------------------
income: lease underwriting fees and residual value fees. The difference between
the Company's acquisition cost for the equipment and the price at which the
equipment is sold to the investor is referred to as the Company's lease
underwriting fee. In addition, the Company often is entitled to share with the
investor in the residual value derived from the remarketing of equipment at
lease expiration or early termination, although in many cases the investor must
receive a specified return before the Company is entitled to such a sharing. At
the time the lease is sold, the Company estimates its expected residual value
participation and records that amount as income at its discounted present value.
Decreases in the Company's expected residual sharing amounts are recorded as a
loss at the time such a determination is made.
Competition. The Company's competitors for investors are other leasing
-----------
companies, financial institutions, including banks, investment banks and other
intermediaries selling tax deferral investments.
-5-
<PAGE>
The Company competes in different ways, depending on the investor and the
competitors involved in a particular transaction. The principal methods by
which the Company competes are through its ability to underwrite lease
transactions, thereby having investment products immediately available, and its
ability to offer the types of investments the Company's customers desire. The
Company also relies upon its reputation and experience in leasing and
remarketing equipment and its experience in selling tax deferral investments to
compete effectively.
LEASES IN THE COMPANY'S PORTFOLIO.
- ---------------------------------
In the period from 1986 through 1989, the Company emphasized the
acquisition of equipment for its own account. Since 1989, due to lack of
available capital, the Company has made modest additions to its portfolio.
During 1995, the Company added $276,000 of equipment (at cost) to its portfolio.
In 1994, the Company acquired no equipment for its own account. In 1995, the
Company disposed of $22.9 million of equipment measured by its original cost on
operating lease and disposed of no equipment on direct finance leases, reducing
the total equipment (net of depreciation, paydowns and writedowns) on operating
lease and direct finance lease in the Company's portfolio to $1.7 million and
$1.4 million, respectively. In 1995, no leases were voluntarily sold by the
Company prior to lease expiration in order to generate sufficient liquidity to
meet short-term needs. In 1994, the Company disposed of $17.4 million (original
cost) of equipment on operating lease and disposed of no equipment on direct
finance leases, reducing the total equipment (net of depreciation, paydowns and
writedowns) on operating lease and direct finance lease in the Company's
portfolio to $7.5 million and $2.0 million, respectively; $13.5 million
(original cost) of the operating lease dispositions were the result of lease
expirations during the normal course of business and an additional $3.9 million
(original cost) of equipment under six leases was voluntarily sold by the
Company prior to lease expiration. In 1993, the Company sold $11.3 (original
cost) of equipment on operating lease and had reductions of $1.2 million
(original cost) to direct finance leases as a result of disposals, reducing the
total equipment (net of depreciation, paydowns and writedowns) on operating
lease and direct finance lease in the Company's portfolio to $16.8 million and
$2.7 million, respectively; $9.2 million (original cost) of the operating lease
dispositions were the result of lease expirations during the normal course of
business and an additional $2.1 million (original cost) of equipment under nine
leases was voluntarily sold by the Company prior to lease expiration.
REMARKETING.
- -----------
The remarketing of equipment plays a vital role in the operations of the
Company. As discussed above, in connection with the sale of lease transactions
to investors, the Company typically is entitled to share in a portion of the
residual value realized upon remarketing. Successful remarketing of the
equipment is essential not only to the realization of the Company's interest in
the residual value but also for the Company to recover its original investment
in the equipment in its portfolios and to recognize a return on that investment.
The Company anticipates continuing to dedicate substantial resources toward
the further development and improvement of its remarketing capabilities and is
hopeful that remarketing will increasingly become a profit center for the
Company. The Company's strategy is to exploit its remarketing expertise by
providing fee-based remarketing services to Fleet owners and lessees and also to
create a
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dealer capability under which the Company would buy and re-sell Fleet equipment.
Pursuant to this strategy, the Company has recently hired an experienced used
Fleet equipment buyer to oversee its dealer function. It is also developing
through brokers its international remarketing capabilities, which during 1994
and 1995 have become an increasing percentage of its remarketing business. It
is also implementing a plan to expand its brokerage activities through the
Internet and the use of other technologies. The Company's senior lender group
has since 1993 permitted the Company to use some of its equipment financing
capability for dealer financing purposes. The Company has developed
relationships with two finance companies to provide financing for remarketing
customers, which the Company intends to expand in 1996.
Since 1988, the Company has greatly expanded and altered its remarketing
activities. In 1990, the Company's remarketing operation headquarters were
consolidated in Boston, with regional sales offices in New Jersey, Tennessee and
Texas, and, in 1992, the Company relocated its Midwestern regional office from
Tennessee to Illinois. In addition, due to its success in remarketing used
Fleet equipment from its retail sales center in New Jersey, the Company has
increased its sales staff in New Jersey and developed indirect retail sales
capabilities in California, Florida, Georgia, Illinois and Texas.
The Company has found that its ability to remarket equipment is affected by
a number of factors. The original equipment specifications, current market
conditions, technological changes, and condition of the equipment upon its
return all influence the price for which the equipment can be sold or re-leased.
Delays in remarketing caused by various market conditions reduce the
profitability of the remarketing.
Remarketing efforts are pursued on a direct retail sale or lease basis. The
Company's Fleet equipment remarketing experience has shown that generally the
greatest residual value is realized by initially re-leasing equipment, rather
than immediately selling it. Therefore, the Company has concentrated its
remarketing efforts on re-leasing, although re-leasing involves more risks than
selling because lessees of used equipment are generally smaller, less
creditworthy enterprises than the Company's initial lessees. The Company has
also enjoyed success selling Fleet equipment through its retail sales centers,
which the Company plans to further develop.
CAPITAL.
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The Company relies upon various sources of capital to support its business
activities. To underwrite lease transactions, the Company relies upon its
short-term warehouse lines of credit and vendor financing programs to pay for
the equipment as deliveries occur and to hold leases in inventory pending sale
to investors. Pursuant to the intercreditor agreement with its senior lender
group described below (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"), the
Company has access to a $1.8 million warehouse line of credit, which in January
1996 was amended and extended to December 31, 1996. This warehouse line of
credit is secured by a security interest in equipment financed under the line
and is premised upon the sale or refinancing by the Company of the inventory
securing the facility. Management is actively seeking to replace the
intercreditor warehouse facility with a larger facility prior to its expiration.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources", below.
In 1993 the Company entered into a secured inventory financing facility
with an asset-based lender
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and lessor based in New York, providing the Company with additional warehouse
loan capability. Under this facility, this lender loans the Company, on a
non-recourse basis, an amount equal to the present value of lease revenues to be
generated by equipment financed under the facility for certain approved credits,
with discount rates and subject to aggregate limits determined for each credit,
and a portion of the expected residual value of the financed equipment. The
excess of the equipment cost over the available loan for equipment financed
under this facility is financed under the Company's intercreditor agreement. As
of February 16, 1996, the Company is financing three of its leases in the
aggregate amount of approximately $2.1 million under this $10 million loan
facility.
The Company's ability to generate sufficient working capital to finance its
short and long-term needs is dependent upon (1) the generation of sufficient
fees from the underwriting and sale of lease transactions to investors, as well
as other fee-based remarketing activities for investors and others, and (2) the
successful realization of residual proceeds for the benefit of investors and the
Company. Continued access to this cash for working capital purposes, and the
amount of such cash, will depend upon its ability to successfully raise and
invest new equity capital and also its ability to perform its obligations under
the final intercreditor loan term-out agreement, which expires in September
1997.
In May 1993, Bruncor converted a $971,573 accrued liability on the
Company's books into 734,908 shares of the Company's Common Stock pursuant to a
March 1993 agreement between the Company and Bruncor relative to the accrued
liability. The conversion was made according to a formula based on the book
value of the stock. The accrued liability arose from interest payments by
Bruncor as of December 31, 1992 under its guarantee of the Company's former $3.7
million loan from The Bank of Nova Scotia, which was liquidated in July 1995 in
connection with Bruncor's sale of its interest in the Company.
On January 20, 1995, the Company effected a 1.475-for-1 split in the form
of a 47.50% Common Stock dividend. On the same day, the stockholders also
approved an amendment to the Articles of Organization in order to increase the
number of shares of Common Stock from 10,000,000 to 30,000,000 and create
10,000,000 shares of preferred stock ($0.01 par value). No preferred stock has
been issued as of March 21, 1996.
The Company has authorized but not issued 10,000,000 shares of preferred
stock, 5,000,000 shares of which are designated as "Series A Convertible
Preferred Stock." Each share of Series A Convertible Preferred Stock is entitled
to the number of votes equal to the number of whole shares of Common Stock into
which the shares of Series A Convertible Preferred Stock held by such holder are
then convertible, bears an annual cumulative dividend of $0.045 per share, and
is convertible into the Company's Common Stock at a price of $0.50, which is
adjustable in accordance with a conversion price formula.
On July 25, 1995, pursuant to an amendment to the Recapitalization
Agreement, Vestex, Bruncor and the Company closed a transaction in which Bruncor
sold all of its Common Stock in the Company to Vestex and the Company, which in
turn awarded Common Stock to its employees. In exchange, Bruncor received
$750,000 from the Company, $400,000 of which was paid to the Company by Vestex,
$142,000 of which was derived from loans to the Company by certain members of
its senior lender group, $8,000 of which was paid to Bruncor as closing expense
reimbursement from the Company's working capital, and $200,000 of which is
represented by a subordinated note. Vestex acquired a 31% interest in the
Company
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and the employees acquired a 20% interest. In addition to the sale of its
majority position, Bruncor also repaid the Company's $3.7 million loan to a
lender which Bruncor had guaranteed and forgave $720,000 of accrued interest on
the loan which Bruncor had paid the lender. As a result of these transactions,
the Company's stockholders' equity increased by approximately $4.0 million in
1995.
SEASONALITY.
- ------------
Because of tax and investment considerations, investors frequently defer
their decisions to purchase lease transactions until after the first quarter of
the year.
EMPLOYEES.
- ---------
As of February 26, 1996, the Company had 38 full-time employees.
ITEM 2. PROPERTIES.
- ------ ----------
The Company leases its principal offices at 745 Atlantic Avenue, Boston,
Massachusetts 02111. The Company also leases branch offices in four other
states. (See Note J to the Company's Consolidated Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------
While the Company is subject from time to time in the normal course of its
business to actions or claims for damages, neither the Company nor any of its
subsidiaries is now party to, nor is any property of the Company or any of its
subsidiaries now subject to, any proceedings currently pending which the Company
believes will have a future material adverse impact on its consolidated
financial position or results of operations. (See Note J to the Company's
Consolidated Financial Statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ --------------------------------------------------------------
MATTERS:
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The Company's Common Stock has traded on the National Association of
Securities Dealers, Inc. ("Nasdaq") OTC Electronic Bulletin Board under the
symbol "CHCR" since January 28, 1994 on the basis of actual trading prices. The
Company's Common Stock had traded from June 30, 1992 to January 28, 1994 on the
Small-Cap Market of the Automated Quotation System of Nasdaq on the basis of
actual trading prices. The Company believes that two dealers are engaged in
making a market for the Company's Common Stock. The following table sets forth,
for the calendar periods indicated, the high and low sales prices January 1,
1994 through February 26, 1996 for each quarter as reported by Nasdaq.
<TABLE>
<CAPTION>
Calendar 1996 High Low
- ------------- ---- ---
<S> <C> <C>
First quarter $.3125 $.187
(through February 26)
<CAPTION>
Calendar 1995 High Low
- ------------- ---- ---
<S> <C> <C>
Fourth quarter .3125 .0625
Third quarter .25 .03125
Second quarter .1875 .09375
First quarter .21875 .09
<CAPTION>
Calendar 1994* High Low
- ------------- ---- ---
<S> <C> <C>
Fourth quarter .2119 .0424
Third quarter .2119 .0636
Second quarter .1695 .0424
First quarter .4237 .1695
</TABLE>
There were approximately 687 beneficial owners of the Company's Common
Stock, as of February 26, 1996.
No cash dividends have been declared or paid during the last three years.
The Company does not have a policy of declaring regular dividends. Under the
terms of an intercreditor agreement the Company is prohibited from paying any
cash dividends. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.")
________________________________
*: Historical market price information prior to January 1, 1995 has been
restated to give retroactive recognition to the Company's January, 1995
47.5% Common Stock dividend. (See Note A to the Company's Consolidated
Financial Statements.)
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ITEM 6. SELECTED FINANCIAL DATA:
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
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1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income $ 4,391 $ 7,630 $ 12,088 $ 16,882 $ 22,302
Lease underwriting income 749 499 857 1,938 3,192
Total revenues 8,491 10,587 14,910 21,838 31,060
Loss from continuing
operations before change
in accounting principle* ( 1,221) ( 3,343) ( 6,596) ( 1,878) ( 6,127)
Net loss* ( 1,221) ( 3,343) ( 5,996) ( 1,878) ( 6,127)
Loss per share from
continuing operations
before change in
accounting principle ( .22) ( .52) ( 1.07) ( .33) ( 1.60)
======== ======== ======== ======== ========
Net loss per share ($ .22) ($ .52) ($ .97) ($ .33) ($1.60)
======== ======== ======== ======== ========
Average common and
common equivalent shares 5,634 6,373 6,174 5,709 5,632
======== ======== ======== ======== ========
</TABLE>
*: The losses include the following unusual costs (in thousands) which
materially affect the comparability of the information above:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Residual value
estimate reductions - - $2,524 - $6,310
Lessee credit-related
losses - - - - 1,520
Organizational res-
tructuring costs - - - 154 463
</TABLE>
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CONSOLIDATED BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1994 1993 1992 1991
------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating leases, net $ 1,683 $ 7,495 $16,792 $28,649 $44,646
Total assets 16,088 23,165 39,741 65,548 89,814
Indebtedness:
Recourse 4,314 11,225 15,069 17,948 20,214
Non-recourse 3,167 5,205 12,390 29,433 42,670
Stockholders' equity (deficit) 1,365 ( 1,421) 1,922 6,943 8,824
</TABLE>
CONSOLIDATED QUARTERLY STATEMENTS OF OPERATIONS DATA
(in thousands)
<TABLE>
<CAPTION>
1995 Quarters
------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 2,334 $1,957 $2,098 $2,102
Costs and expenses 3,043 2,634 2,087 1,948
Net profit (loss) ( 709) ( 677) 11 154
1994 Quarters
------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 2,447 $2,905 $2,656 $2,579
Costs and expenses 3,914 3,588 3,305 3,114
Net profit (loss) (1,488) ( 706) ( 671) ( 478)
</TABLE>
For a discussion of the Company's dividend policy, see Item 5, "Market for the
Company's Common Equity and Related Stockholder Matters."
For a discussion of indebtedness, see Note G of the Company's Consolidated
Financial Statements.
-12-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
Results of Operations
- ---------------------
Revenues for the year ended December 31, 1995 decreased to $8.5 million as
compared to $10.6 million and $14.9 million for the years ended December 31,
1994 and 1993, respectively. The Company reported a net loss of $1.2 million
($.22 per share) for 1995 as compared with a net loss of $3.3 million ($.52 per
share) for the year ended December 31, 1994 and a net loss of $6.0 million ($.97
per share) for the year ended December 31, 1993.
Rental Income
- -------------
Rental income, primarily from the Company's portfolio of leased equipment,
was $4.4 million for the year ended December 31, 1995, versus $7.6 million and
$12.1 million for the years ended December 31, 1994 and 1993, respectively. Most
rental income is used to service non-recourse debt secured by leases. The
Company added $276,000 of equipment (at cost) to its portfolio in 1995 but had
no additions to its portfolio in 1994 or 1993. During 1995, the Company disposed
of $22.9 million of equipment from its portfolio in the aggregate as measured by
its original cost, which coupled with the lack of additions to the portfolio
contributed to the decline in rental revenues. For a discussion of these
dispositions, see "Leases in the Company's Portfolio" above.
Since 1990, the Company has dramatically reduced its accounting recognition
of its residual interest in all new assets acquired for its own portfolio as
well as in those assets it manages for other investors. It has also made
substantial improvement in the relative residuals realized from like kinds of
assets over the past five years. For a discussion of these improvements, see
"Remarketing" above. In 1993, the Company voluntarily sold $2.1 million of
equipment under nine leases from its portfolio, and in 1994 it voluntarily sold
an additional $3.9 million of equipment under six leases from its portfolio
prior to lease expiration (all as measured by the original equipment cost).
There were no voluntary sales of leases prior to lease expiration in 1995. The
voluntary portfolio sales in prior years were made in order to generate cash to
meet the Company's operating and debt service requirements. The sale of assets
from the portfolio reduces future rental income and the associated future
profits which may be derived from continued ownership thereof. These portfolio
reductions are expected to continue as the Company is presently unable to add
significantly to its portfolio due to the lack of capital necessary to finance
the required investment in leased equipment (see "Liquidity and Capital
Resources").
Lease Underwriting Income
- -------------------------
Lease underwriting revenue is one of the Company's continuing active
business lines. Lease underwriting income was approximately $749,000 for the
year ended December 31, 1995, $499,000 for the year ended December 31, 1994 and
$857,000 for the year ended December 31, 1993. These revenues are derived from
the sale to investors of $27 million of leased equipment in 1995, as compared to
sales of $14 million in 1994 and $32 million in 1993. Net profit margins (cash
net of interest carrying costs) derived from these sales were .5% for 1995, as
compared to 1.4% for 1994 and 1.0% for 1993. When
-13-
<PAGE>
including residual fee income, overall profit margins were 2.67%, 3.68% and
2.88% 1995, 1994 and 1993, respectively. The decrease in lease equipment volume
in 1994 was due to a reduction in the origination sales efforts. Competitive
factors in origination saless has continued to keep margins at historically low
levels.
At December 31, 1995 the Company held in its inventory $1.9 million
(original cost) of lease transactions for sale to third parties as compared to
$2.6 million at December 31, 1994. Management believes that the Company is not
limited in its capacity to originate and sell equipment lease transactions by
lack of lessee transaction opportunities or institutional investors seeking
transactions in which to invest.
Residuals. Lease underwriting income includes the present value of the
---------
Company's share of the estimated future residual values expected to be realized
from lease transactions sold to investors. For the year ended December 31,
1995, the Company recognized as residual fee income $605,000 derived from the
sale of $27 million of equipment to investors. By comparison, for the years
ended December 31, 1994 and 1993, the Company recognized as residual fee income
$300,000 derived from the sale of $14 million of equipment to investors, and
$500,000 derived from the sale of $32 million of equipment. As of December 31,
1995, the Company's share of residual values which it expects to receive in the
future from the disposition of equipment owned by investors was $3.3 million as
compared to $3.1 million at December 31, 1994.
The Company engages in a continuing review of its valuation of all
equipment in its portfolios or under management. It monitors the relative
performance of its disposal methods including both the release and sale of
assets on a monthly basis comparing results to established residual accounting
booking policies. Every asset is tracked to its ultimate disposition and all
out-of-pocket costs are netted against gross revenues realized. The Company
establishes its accounting residual values based on a number of criteria
including: (1) long term (generally 10 years) variances from mean in the used
fleet equipment market; (2) specific asset characteristics including
specifications, use and cost; (3) the Company's own asset disposition experience
which includes over 10,000 units; and (4) external assessors of fleet assets
including the "Blue Book" guide, auction results, and retail classified
advertisements. Accordingly, the Company periodically monitors performance
against these measures in order to determine if adjustments in residual value
assumptions are necessary.
The Company effected no reductions in its estimated future residuals during
1995 or 1994. During the fourth quarter of 1993, the Company recognized a $2.5
million reduction in estimated future residual values of certain assets,
primarily relating to trust and portfolio residuals. These residual adjustments
were the result of several important factors, including: (1) the substantial
experience and data which the Company continues to gain since it began
remarketing activities in 1988; (2) market conditions for used equipment, and
particularly used transportation equipment, resulting from regulatory and
technological changes, use patterns, maintenance costs and competitive margins
associated with the revenue-generating capability of such assets; (3) continued
improvements in the Company's data processing systems allowing the Company to
assess more accurately the impact of changing values attributable to equipment
with varying specifications; and (4) factors affecting the used transportation
equipment market and the economy generally leading to dramatic variances in
rates of inflation on new equipment as well as 20 - 30% variances above and
below mean in the price of used fleet equipment. Substantially all of the
residual write-down
-14-
<PAGE>
for the year 1993 was associated with equipment leased and sold to investors by
the Company prior to 1988. Experience and data gained since that time caused
management to conclude that the residual value assumptions made prior to 1988
were no longer appropriate.
In 1993, the Company refined its valuation model based on experience which
indicated that sales prices on equipment which was first released and then
subsequently sold were less than prices realized on equivalent aged equipment
sold immediately after its original lease. Further, the Company noted that the
effect of manufacturers' model year changeovers on equipment values was more
important than the equipment's age at lease expiration and changed the valuation
model accordingly resulting in the fourth quarter 1993 trust residual asset
reduction of $1.0 million (see Note C) and $1.2 million reduction in the direct
finance and operating lease portfolios (Note F). The Company believes it now
has sufficient historical experience to estimate future equipment values within
a narrow range, assuming a macroeconomic environment with low inflation and
moderate growth. The Company continues to build a remarketing distribution
system using used truck dealers to supplement the Company's own sales and
telemarketing group. The remarketing operation is generally unaffected by the
Company's financial difficulties. The Company does not expect the reductions to
continue in the future.
Gains from Portfolio Remarketing. Gains from portfolio remarketing are
--------------------------------
realized when equipment initially subject to a lease in the Company's direct
finance or operating lease portfolio is sold at a price above its book value.
Gains from portfolio remarketing fluctuate principally because of the value of
equipment which becomes available each year at lease expiration, changes in the
used equipment market, particularly for Fleet assets, and the Company's
performance in remarketing the equipment.
In 1995, gains increased 254% versus the prior year to $2.2 million on
sales of equipment with an original cost of $22.9 million, a 27% performance
increase based on original cost as compared to 1994 where gains were $633,000 on
sales of equipment with an original cost of $17.4 million. The 1994 performance
represented an increase in gains of 126% compared with 1993 gains of $280,000 on
sales of equipment with an original cost of $12.4 million.
The Company measures its total remarketing performance against a
proprietary benchmark which values equipment based on its specifications and age
at lease expiration. The table below illustrates the Company's performance based
on this measure:
<TABLE>
<CAPTION>
Performance Improvement Cumulative
as % of Company's (Decline) vs. Improvement
Benchmark Prior Year Since 1990
------------------ --------------- ------------
<S> <C> <C> <C>
1995 135% (17%) 54%
1994 152% 18% 71%
1993 134% 9% 53%
1992 125% 6% 44%
1991 119% 38% 38%
1990 81% - -
</TABLE>
-15-
<PAGE>
Fees from Remarketing Activities. Fees from remarketing activities are
--------------------------------
realized when the Company releases or sells equipment owned by others, including
equipment under leases previously sold by the Company to investors. Gross fees
are netted by any residual values previously booked by the Company. Gains from
remarketing activities fluctuate because of the value of equipment which becomes
available each year from leases previously sold by the Company, the terms of new
contracts to remarket equipment on behalf of others, changes in the used
equipment market, and the Company's remarketing performance.
In 1995, fees from this source were $668,000, a decrease of 42% as compared
to 1994 when fees were $1,160,000. The decline is due to a lower volume of
activity as well as lower values for the equipment. The 1994 performance
represented an increase of 84% compared with 1993 fees of $629,000.
Expenses. Selling, general and administrative expenses for the year ended
--------
December 31, 1995 amounted to $5.2 million versus $5.3 million for the year
ended December 31, 1994 and $6.6 million for the year ended December 31, 1993.
The Company reduced its headcount in 1994 and undertook other cost measures to
reduce selling, general and administrative expenses.
Depreciation and amortization expenses decreased to $3.4 million for the
year ended December 31, 1995 from $6.4 million and $8.5 million, respectively,
for the years ended December 31, 1994 and 1993. The decrease is directly
attributable to the decrease in the size of the Company's operating lease
portfolio.
Interest expense for the year ended December 31, 1995 was $1.0 million
versus $2.1 million and $2.9 million, respectively, for the years ended December
31, 1994 and 1993. These decreases have resulted largely from the reduction in
the size of the Company's portfolio and the corresponding substantial reduction
in non-recourse debt, as well as the elimination of $3.5 million of subordinated
recourse debt as part of the July 1995 recapitalization transaction described
below in "Liquidity and Capital Resources."
Income Taxes. The Company adopted the Statement of Financial Accounting
------------
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1,
1993, and recorded the cumulative effect of this change, which increased net
income by $600,000. This statement requires recognition of deferred assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferrex assets and liabilities are determined based on the differences between
the financial statements and the tax basis of assets and liabilities using
enacted tax rates. There was no provision for income taxes for the year ended
December 31, 1995, as compared to a provision of $9,000 for the year ended
December 31, 1994. The provision for income taxes for the year ended December
31, 1993 reflects a benefit of $471,000, which includes a provision for state
income taxes of $29,000. (See note H to the consolidated financial statements.)
Summary. The net after-tax losses incurred by the Company are the result
-------
of many of the items discussed in the preceding paragraphs. In order for the
Company to regain and maintain profitability and to generate positive cash flow,
costs must continue to be managed; the volume of leased equipment underwritten
and sold must grow; margins obtained from those sales must remain relatively
stable or increase; residual realization must be sustained relative to recorded
values; warehouse financing must be sufficient to permit the Company to meet its
current operating requirements; and the Company must generate brokerage and
other service fees by capitalizing on its remarketing strengths. Steps continue
to
-16-
<PAGE>
be taken to address each of these requirements, and management believes that,
assuming the addition of new capital for investment in the Company's portfolio
and for investment in certain remarketing and other business operations, the
Company will continue to be able to make progress in 1996 toward an eventual
return to sustained profitability.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has four principal sources of financing: (1) an intercreditor
loan, (2) a secured inventory loan, (3) a non-recourse inventory loan facility,
and (4) a subordinated loan.
The intercreditor loan had a balance of $2.3 million as of December 31,
1995. Repayment of the loan is secured by virtually all assets of the Company
not otherwise encumbered. Since April 1990, when the intercreditor loan was
formed through the restructuring of most of the Company's unsecured recourse
debt, the intercreditor loan has been renewed 25 times. The most recent renewal
dated January 31, 1996 represents the final term-out of the intercreditor loan
and provides for the full repayment of the debt as a term loan in fixed monthly
principal payments through September 25, 1997 (which will be accelerated to
December 31, 1996 if the Company has not refinanced or repaid the intercreditor
warehouse line facility by that date). During each renewal period, the
intercreditor group lenders agreed to refrain from exercising certain rights
under their original individual loan agreements in exchange for the Company's
agreements to (a) make principal and interest payments as agreed, (b) secure the
continued subordination by another lender, and (c) operate within other
covenants typical for this type of financing, including a prohibition on payment
of dividends and restrictions on capital spending. Interest rates under the
current renewal agreement are all at a floating rate of prime plus 2%.
A secured inventory loan of $1.8 million as of December 31, 1995 (which
will remain in place at this amount until December 31, 1996) is provided by the
same intercreditor lender group. Although the inventory loan has historically
been renewed on the same basis as the term loan described above, the current
renewal requires that the inventory loan be fully repaid by December 31, 1996,
nine months sooner than the expiration of the term loan. This inventory loan is
secured by either cash or equipment subject to leases. This facility allows the
Company to purchase equipment subject to a lease before selling the transaction
to an investor. The interest rate is 2% above the prime rate.
The Company also has a non-recourse loan facility which supplements the
secured inventory loan described above. The non-recourse loan facility provides
for the financing of the discounted lease stream and a portion of the residual
value of the equipment subject to those leases. Loans under this facility are
subject to the lender's approval of the lessees' credits and collateral lease
documentation, bear interest at 2% over the prime rate, and are payable within
180 days of each borrowing, unless the lender extends the maturity date or
exercises its right to convert the loan into a long-term non-recourse loan.
This credit line provides a maximum financing capacity of $10 million. As of
December 31, 1995, $1.3 million was outstanding under this facility.
The Company's ability to underwrite equipment lease transactions is largely
dependent upon the continuing availability of short-term warehouse lines of
credit. Management is engaged in a continuing dialogue with several possible
alternative inventory lenders which appear to be interested in providing the
-17-
<PAGE>
Company with warehouse financing. If the Company were to lose either of its
existing credit lines, or if their availability were reduced, the Company would
take immediate steps to replace either or both of them with one or more
alternative warehouse facilities. If the Company experienced unexpected delays
in putting a new warehouse facility in place, it would temporarily disrupt the
Company's ability to underwrite new equipment leases until the new warehouse
financing was secured.
The Company also has a subordinated loan of $200,000 due to its former
majority owner.
The Company's operating lease portfolio is largely responsible for enabling
the Company to sustain its operations from 1990 to the present in that it has
provided a source of collateral security and, through lease sales and residual
disposition, liquidity to meet the demands of its lenders while also
contributing towards the Company's working capital requirements. The Company
believes that its financial crisis in early 1990 resulted from unfavorable
residual performance on its managed portfolio compared with residual fee income
booked prior to that time, an ineffective remarketing organization, and the
unexpected withdrawal of financial support by the Company's former majority
shareholder, Bruncor, and was aggravated by a variety of factors which are
addressed throughout this report, including under the captions "Rental Income,"
"Lease Underwriting Income," "Residuals," and elsewhere in "Liquidity and
Capital Resources."
Since 1990, the Company's ability to sustain its operations and meet its
ongoing working capital requirements has been exclusively dependent upon the
continued availability of internally generated cash arising primarily from lease
underwriting and brokerage fees and residual value realization.
The remarketing of equipment has played and will continue to play a vital
role in these activities. In connection with the sale of lease transactions to
investors, the Company typically is entitled to share in a portion of the
residual value realized upon remarketing. Successful remarketing of the
equipment is essential to the realization of the Company's interest in the
residual value of its managed portfolio. It is also essential to the Company's
ability to recover its original investment in the equipment in its own
portfolios and to recognize a return on that investment.
The Company has found that its ability to remarket equipment is affected by
a number of factors. The original equipment specifications, current market
conditions, technological changes, and condition of the equipment upon its
return all influence the price for which the equipment can be sold or re-leased.
Delays in remarketing caused by various market conditions reduce the
profitability of the remarketing.
Remarketing efforts are pursued on a direct retail sale or lease basis. The
Company's Fleet equipment remarketing experience has shown that generally the
greatest residual value is realized by initially re-leasing equipment, rather
than immediately selling it. Therefore, the Company has concentrated its
remarketing efforts on re-leasing, although re-leasing involves more risks than
selling because lessees of used equipment are generally smaller, less
creditworthy enterprises than the Company's initial lessees. The Company has
also enjoyed success selling Fleet equipment through its retail sales centers,
which the Company plans to further develop. The Company is also devoting
resources to the development of international remarketing capabilities.
-18-
<PAGE>
The net result of these improvements in its remarketing activities has been
an improvement in the residual values that the Company actually realizes for the
benefit of itself and its investors from its Fleet equipment dispositions, which
is illustrated above in the remarketing performance vs. benchmark chart under
"Gains from Portfolio Remarketing." The historical volume and cash flow from
this activity follows:
<TABLE>
<CAPTION>
Cash Flow to the Company from Remarketing
-----------------------------------------
(in millions except unit numbers)
Company's
Year Units Remarketed Original Cost Portfolio Trusts* Total
- ---- ---------------- ------------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
1995 2,265 $87.7 $5.7 $1.1 $6.8
1994 3,063 $89.4 $3.0 $2.3 $5.3
1993 1,817 $60.5 $2.0 $1.8 $3.8
1992 1,997 $44.5 $2.6 $ .5 $3.1
1991 1,332 $44.7 $3.6 $ .5 $4.1
1990 974 $43.0 n.a. n.a. n.a.
</TABLE>
_____________________________
*: The Company shares in the benefits of remarketing activities with the
investors in these trusts as described under "Lease Underwriting Income -
Residuals" and - Fees from Remarketing Activities" above. The amounts
reflected in the Trusts column represent net fees and residual sharing paid
to the Company by the trusts.
Due to declining volumes of equipment reaching lease expiration in 1996, the
Company estimates, based on various assumptions including its ability to sustain
recent levels of performance, that cash flow from remarketing assets will be
about $2.7 million less in 1996 than the $6.8 million realized in 1995.
The Company anticipates continuing to dedicate substantial resources toward
the further development and improvement of its remarketing capabilities and
believes that remarketing will increasingly become a profit center for the
Company. The Company's strategy is to further exploit its remarketing expertise
by continuing to develop its ability to sell remarketing services to other
lessors, fleet owners, and lessees and also to create a dealer capability under
which the Company would buy and re-sell Fleet equipment. The Company is also
implementing a plan to expand its brokerage activities through the Internet and
the use of other information technologies. In addition to dedicating existing
personnel and resources to this activity, the Company recently hired an
experienced used Fleet equipment buyer to oversee the this dealer function,
including identifying attractive used equipment purchase and sale opportunities.
Since February 1993, the Company's senior lender group has permitted the Company
to use some of its equipment financing capability for dealer financing purposes.
The Company has established relationships with several finance companies to
finance dealer activities and remarketing leases which it plans to further
develop in 1996.
The Company also took steps in 1990 and 1991 to implement residual booking
levels which today the Company is usually capable of surpassing by 30% to 40%
percent. Although minor adjustments to reflect market changes or further
advances in asset knowledge may be made in the future, the Company does not
expect to meaningfully alter its present residual booking levels going forward.
-19-
<PAGE>
Notwithstanding the increase in its remarketing business activity, the
Company's selling, general and administrative expense has been reduced from $6.6
million in 1993 to $5.2 million in 1995. The Company believes that it will be
able to sustain these levels of reduced costs to run the business as it is
currently operated going forward as a result of the systems-based productivity
improvements that have been implemented over the past four years.
While external funds such as short-term warehouse financing and non-
recourse debt to finance the discounted present value of the lease payments have
been consistently available to finance equipment, other sources of funds
(notably investment capital to fund the equity portion of its leases) were
inadequate to meet the Company's needs from 1988 through early 1990. In April
1990, the Company and most of its unsecured recourse lenders signed a four-month
intercreditor agreement which restructured approximately $25.9 million of
outstanding loans. This intercreditor agreement called for granting of security
interests in the Company's unencumbered assets, collateralization of the
outstanding balances of the restructured credit facilities, and the forbearance
of the loan balances. Since April 1990, the intercreditor agreement has been
amended and extended 25 times, most recently for a twenty-month period expiring
September 25, 1997, which will fully amortize the intercreditor loan. The
extension agreements have included negotiated monthly debt service terms and
working capital allotments available to the Company according to the projected
revenues and cash requirements of the Company during the periods covered by
these agreements. In 1995, the Company reduced the principal balance of the
forborne indebtedness by $2.2 million to $2.3 million as of December 31, 1995,
since which time the Company has further reduced forborne indebtedness by
$218,000 to approximately $2.1 million as of February 26, 1996 pursuant to
$109,000 monthly principal reductions which continue through September 1997.
The current extension represents the final term-out of the intercreditor
loan with regular monthly principal reductions through September 1997. The
agreement also requires that the Company repay in full the inventory loan by
December 31, 1996, and if the Company fails to do so, the term loan will be due
on December 31, 1996. The other terms of the original agreement generally remain
in place, and the Company reinvests, pursuant to the terms of the agreement, all
of the proceeds derived not only from asset sales but also from normal operating
activities in an account which is used to satisfy the collateralization and debt
repayment requirements of the agreement, as well as the Company's warehouse
financing and working capital needs. The current extension also significantly
reduced the interest rate applicable to both the term and inventory loans to
prime plus two percent from fixed rates as high as 15.5% and floating rates of
prime plus 3.5%.
In connection with an extension agreement negotiated in February 1993, the
Company granted the lender group warrants to purchase up to 10% of the Common
Stock of the Company on a fully diluted basis for $0.85 per share in
consideration of the lenders' having accommodated several loan modifications
requested by the Company, including a limited amount of buy/sell remarketing
financing capability. In July 1995, the lender group agreed to surrender 90% of
these warrants if its loans are repaid in full prior to July 31, 1996 as an
incentive to such repayment.
Management believes that the Company requires additional equity capital for
investment in the Company's portfolio and in certain remarketing and other
business operations in order to maximize the value of the Company for its
stockholders (although additional equity capital will have a substantial
dilutive
-20-
<PAGE>
effect on the stockholders' percentage interest in the Company). In August
1993, the Company reported that it had actively begun a search for investment
capital and that it had begun to engage in preliminary discussions with the
investment banking community to determine the best way to accomplish its goals.
Following an announcement in December 1993 that the Company's majority owner,
Bruncor Inc. ("Bruncor"), had decided to write off its investment in the
Company, the Company reported that it had retained investment advisors to assist
in identifying capital and financing alternatives.
After discussions with several financial institutions, the Company entered
into a letter of intent with Vestex Corporation ("Vestex"), a private financial
services firm, in June 1994. In September 1994, the Company, Bruncor and Vestex
entered into a definitive Recapitalization and Stock Purchase Agreement pursuant
to which a private investment group organized by Vestex ("Purchaser") would,
among other things, acquire Bruncor's controlling interest in the Company and
5,000,000 shares of a newly-created Series A Convertible Preferred Stock and
would infuse $2.5 million of equity capital into the Company (the
"Recapitalization"), subject to the approval of the Company's stockholders. The
Company's stockholders approved the Recapitalization and certain related matters
at a Special Meeting of the stockholders held on January 20, 1995. After Vestex
failed to consummate the Recapitalization prior to the expiration of the
recapitalization agreement on March 31, 1995, the Company renewed discussions
with several financial institutions which conducted preliminary due diligence in
order to determine their possible interest in the Company. Management meanwhile
pursued possible opportunities for recourse debt restructuring and for the
disposition of Bruncor's interest in the Company.
On July 25, 1995, pursuant to an amendment to the Recapitalization
Agreement, Vestex, Bruncor and the Company closed a transaction in which Bruncor
sold all of its Common Stock in the Company to Vestex and the Company, which in
turn awarded Common Stock to its employees. In exchange, Bruncor received
$750,000 from the Company, $400,000 of which was paid to the Company by Vestex,
$142,000 of which was derived from loans to the Company by certain members of
its senior lender group, $8,000 of which was paid to Bruncor as closing expense
reimbursement from the Company's working capital, and $200,000 of which is
represented by a subordinated note. Vestex acquired a 31% interest in the
Company and the employees acquired a 20% interest. In addition to the sale of
its majority position, Bruncor also repaid the Company's $3.7 million loan to a
lender which Bruncor had guaranteed and forgave $720,000 of accrued interest on
the loan which Bruncor had paid the lender. As a result of these transactions,
the Company's stockholders' equity increased by approximately $4.0 million in
1995.
As part of the transaction, Vestex agreed to infuse $2 million of new
capital into the Company, in three installments through December 1995, in
exchange for 5 million shares of Preferred Stock. These funds were to have been
available to the Company, both prior to and following the closing, for lease
portfolio acquisition. Vestex, however, failed to pay the first installment due
on September 15, 1995 and, following the expiration of Vestex's ten-day cure
period on September 26, 1995, the Company declared Vestex in default and
canceled the Recapitalization Agreement as amended. As a result of Vestex's
default, Stephen G. Morison, the Company's President and Chief Executive
Officer, assumed the right to direct the voting of Vestex's 1,600,000 shares of
Common Stock pursuant to an Interim Voting Agreement among Vestex, Mr. Morison
and certain other parties.
The Company's Board and management continue to believe that the Company
requires new equity
-21-
<PAGE>
capital in order to resume a strategy of portfolio investment which it had
successfully pursued during the late 1980's as well as to invest in certain
remarketing and other business operations. In light of Vestex's default under
the Recapitalization Agreement as amended, the Board is actively pursuing
raising equity through private investors, including a possible restructured
preferred stock transaction involving Vestex.
A significant portion of the Company's assets is pledged as collateral for
the Company's non-recourse indebtedness. As of December 31, 1995, approximately
$4.3 million (or 57.7%) of indebtedness represented a direct liability of the
Company; the remainder, approximately $3.2 million (or 42.3%), was non-recourse.
Amounts due under non-recourse notes are obligations of the Company which are
secured only by the leased equipment and assignments of lease receivables, with
no recourse to any other assets of the Company. The significant near-term
maturities of this non-recourse debt (see Note G of the Company's Consolidated
Financial Statements) are not expected to affect the Company's liquidity because
the debt is expected to be fully amortized by the assignment of the collateral
leases and payment by the related lessees of lease rentals directly to the non-
recourse lenders. The availability of the leased equipment for remarketing
following termination of the leases and retirement of the non-recourse debt is
expected to produce residual income which would improve the Company's liquidity.
Cash and cash equivalents amounted to $185,000 at December 31, 1995 as
compared to $79,000 at December 31, 1994. Cash restricted and escrowed amounted
to $4.5 million at December 31, 1995 and $5.1 million at December 31, 1994.
Withdrawals of restricted cash balances are confined to debt service and working
capital allotments, whereas the use of escrowed balances is confined to debt
service payments.
Restricted balances represent the equipment cash collateral account under
the intercreditor agreement and funds collected by the Company on behalf of
trust investors consisting of rental income and sales proceeds related to leases
in which they have an equity interest. A related liability exists on the balance
sheet until the funds have been distributed to the appropriate investors. The
related liability of approximately $2.6 million is included in "Accounts Payable
and Accrued Expenses." A sum of approximately $900,000 is confined to debt
service, working capital allotments and equipment purchases.
In December 1993, in connection with the consolidation of its office space
and renegotiation and amendment of its corporate office lease, the Company paid
a $100,000 security deposit and executed a promissory note in favor of its
landlord in the principal amount of $796,510 due January 1999. The note, which
does not bear interest, will be fully canceled if the Company fulfills its
remaining lease obligations without default. If the Company defaults under the
lease, the note will be accelerated and the security deposit will be forfeited.
While no assurances can be given, management believes that the Company will
continue to perform its obligations, including the timely payment of rent, under
its amended lease throughout the remaining term, provided that the Company will
return to profitable operations in the future.
In order to minimize the amount of recourse debt or equity necessary to
finance a lease portfolio, the Company typically assigns the future rentals to a
nonrecourse lender. The non-recourse lender is virtually always granted a
security interest in the leased equipment and legally assigned the financed
lease, including the right to receive rentals and other sums directly until the
non-recourse loan is repaid. Consequently, the Company does not generate any
cash flow from the transaction until the nonrecourse
-22-
<PAGE>
lender is repaid, i.e., at lease expiration. Liquidity generated from the
portfolio depends upon whether the equipment is released or sold at lease
expiration. A range of projected residual values from the operating lease and
direct finance lease portfolio is provided below.
The "Residual Sale Value" assumes a sale at lease expiration at a low
retail valuation. The "Release and Residual Sale Value" assumes a 12-month
release (for trucking-related and forklift equipment) followed by a sale at a
----------------
low retail valuation. No assurances can be given that the projected remarketing
performance will actually be achieved. The analysis below excludes $5.8 million
(at original cost) of frozen carbonated beverage machines with an estimated fair
market value of $448,000 currently on a month-to-month lease with Circle K and
also excludes $3.6 million (at original cost) of forklifts with an estimated
fair market value of $736,000 which were pending renewal or termination notice
from the lessee, the Ford Motor Company.
<TABLE>
<CAPTION>
(In Thousands)
Sale at Lease Expiration Sale following 12-month Release
------------------------ -------------------------------
Equipment Equipment Release and
(at Cost) Residual (at Cost) Residual
Year When Sold Sale Value When Sold Sale Value
- ---- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
1996 $ 9,326 $1,555 $ 4,187 $ 972
1997 1,467 352 5,471 1,407
1998 3,906 823 2,670 581
1999 398 133 2,690 849
2000 209 63 78 11
Thereafter 386 51 596 147
------- ------ ------- ------
TOTAL $15,692 $2,977 $15,692 $3,967
======= ====== ======= ======
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
- ------ -------------------------------------------
The financial statements and financial statement schedules are
incorporated in this report on Pages F-1 through F-22.
ITEM 9. DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE:
- ------ ----------------------------------------------------
Not applicable.
-23-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
- ------- --------------------------------------------------
The information required by Item 401 of Regulation S-K with respect to
directors of the registrant will be set forth in the Proxy Statement
for the Annual Meeting of Stockholders to be held on June 6, 1996 and
to be filed with the Securities and Exchange Commission in April 1996,
and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION:
- ------- ----------------------
The information required by Item 402 of Regulation S-K regarding
executive compensation will be set forth in the Proxy Statement for
the Annual Meeting of Stockholders to be held on June 6, 1996, and is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
- ------- --------------------------------------------------------------
The information required by Item 403 of Regulation S-K will be set
forth in the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 6, 1996, and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
- ------- ----------------------------------------------
The information required by Item 404 of Regulation S-K will be set
forth in the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 6, 1996, and is incorporated herein by this reference.
-24-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
- ------- ---------------------------------------------------------------
(a) The following documents are filed as a part of this report on Form 10-K:
(1) Financial Statements: Page No.
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-3
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
through
F-22
(2) Financial Statement Schedules:
None
All schedules are omitted because they are not applicable, not
required, or because the required information is included in the
consolidated financial statements.
(3) Exhibits:
3(a) Restated Articles of Organization of the Company (incorporated by
reference from Exhibit 3A to the Company's Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on July 22, 1983
(Registration Statement)), as amended by Articles of Amendment filed with
the Massachusetts Secretary of State on May 18, 1990 (incorporated by
reference from Exhibit 3(a) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1991) and by Articles of Amendment filed with
the Massachusetts Secretary of State on January 26, 1995 (incorporated by
reference from Exhibit 3(a) to the Company's Annual Report, Form 10-K, for
the year ended December 31, 1994).
-25-
<PAGE>
3(b) By-laws of the Company, as amended to date (incorporated by reference from
Exhibit 3(b) to the Company's Annual Report, Form 10-K, for the year ended
December 31, 1994).
10(g) Lease dated June 8, 1988 between Arthur DiMartino, Trustee of 745 Atlantic
Realty Trust and the Company (incorporated by reference from Exhibit 10M
to the Company's Annual Report, Form 10-K, for the fiscal year ended March
31, 1988), as was provisionally amended by a proposal letter dated June
11, 1990, from Richard A. Galvin to Stephen G. Morison (incorporated by
reference from Exhibit 10(g) to the Company's Annual Report, Form 10-K,
for the year ended December 31, 1990); First Amendment to Lease, dated as
of June 5, 1992, between the Company and The Aetna Casualty and Surety
Company (incorporated by reference from Exhibit 2 to the Company's Form 8-
K filed with the Securities and Exchange Commission on July 6, 1992 and
dated June 23, 1992); and Second Amendment to Lease, dated as of December
8, 1993, between the Company and The Aetna Casualty and Surety Company
(incorporated by reference from Exhibit 1 to the Company's Form 8-K filed
with the Securities and Exchange Commission on January 24, 1994 and dated
December 8, 1993).
10(j) Loan Agreement dated as of April 6, 1990 between Shawmut Bank, N.A. -
Corporate Trust Division, as agent ("Agent"), and the Company, Chancellor
Fleet Corporation, Chancellor Acquisition Corporation, Chancellor Asset
Management Corporation, Chancellor Financialease, Inc., Chancellor Credit,
Ltd., Valmont Financial Corporation and Valmont Credit Corp. ("Borrowers")
(incorporated by reference from Exhibit 10(j) to the Company's Annual
Report, Form 10-K, for the year ended December 31, 1989), as amended by
Amendment No. 1 to Loan Agreement dated as of May 16, 1990 between Agent
and Borrowers, Amendment No. 2 to Loan Agreement dated as of June 12, 1990
between Agent and Borrowers, Amendment No. 3 to Loan Agreement dated as of
July 9, 1990 between Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1990), Amendment and Extension Agreement dated as of
July 30, 1990 between Agent and Borrowers (incorporated by reference from
Exhibit 28A to the Company's Quarterly Report, Form 10-Q, for the quarter
ended June 30, 1990) Amendment No. 5 to Loan Agreement dated as of October
15, 1990 between Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1990), Second Amendment and Extension Agreement dated
as October 31, 1990 between Agent and Borrowers (incorporated by reference
from Exhibit 3 to the Company's Form 8-K filed with the Securities and
Exchange Commission on November 1, 1990 and dated October 25, 1990), Third
Amendment and Extension Agreement dated as of January 31, 1991 between
Agent and Borrowers by reference from Exhibit 2 to the Company's Form 8-K
filed with the Securities and Exchange Commission on February 8, 1991 and
dated January 31, 1991), Fourth Amendment and Extension Agreement dated as
of April 30, 1991 between Agent and Borrowers (incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on May 2, 1991 and dated May 1, 1991), Fifth Amendment
and Extension Agreement dated as of July 31, 1991 between Agent and
Borrowers (incorporated by reference from Exhibit 2 to the Company's Form
8-K filed with the Securities and Exchange Commission on August 12, 1991
and dated July 19, 1991), Sixth Amendment and Extension Agreement dated as
of September 18, 1991 between Agent and Borrowers (incorporated by
reference from Exhibit 2 to the Company's Form 8-K filed
-26-
<PAGE>
with the Securities and Exchange Commission on September 25, 1991 and
dated September 18, 1991), Seventh Amendment and Extension Agreement dated
as of November 19, 1991 between Agent and Borrowers (incorporated by
reference from Exhibit 2 to the Company's Form 8-K filed with the
Securities and Exchange Commission on November 25, 1991 and dated November
19, 1991), Eighth Amendment and Extension Agreement dated as of March 19,
1992 between Agent and Borrowers (incorporated by reference from Exhibit
10(j) to the Company's Annual Report, Form 10-K, for the year ended
December 31, 1991), Ninth Amendment and Extension Agreement dated as of
May 5, 1992 between Agent and Borrowers (incorporated by reference from
Exhibit 2 to the Company's Form 8-K filed with the Securities and Exchange
Commission on May 14, 1992 and dated May 5, 1992), Tenth Amendment and
Extension Agreement dated as of August 4, 1992 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the Company's Form 8-K filed
with the Securities and Exchange Commission on August 14, 1992 and dated
August 4, 1992), Eleventh Amendment and Extension Agreement dated as of
November 5, 1992 between Agent and Borrowers (incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on November 16, 1992 and dated November 5, 1992),
Twelfth Amendment and Extension Agreement dated as of February 5, 1993
between Agent and Borrowers (incorporated by reference from Exhibit 2 to
the Company's Form 8-K filed with the Securities and Exchange Commission
on February 16, 1993 and dated February 5, 1993), Modification of Loan
Agreement and Forbearance Agreement dated as of June 30, 1993 between
Agent and Borrowers (incorporated by reference from Exhibit 2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
July 19, 1993 and dated June 9, 1993), Moratorium Agreement dated as of
October 29, 1993 between Agent and Borrowers incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on November 10, 1993 and dated October 29, 1993),
Moratorium Amendment dated as of December 24, 1993 between Agent and
Borrowers (incorporated by reference from Exhibit 2 to the Company's Form
8-K filed with the Securities and Exchange Commission on January 24, 1994
and dated December 8, 1993), Second Moratorium Amendment dated as of March
25, 1994 between Agent and Borrowers (incorporated by reference from
Exhibit 1 to the Company's Form 8-K filed with the Securities and Exchange
Commission on April 1, 1994 and dated March 25, 1994), Third Moratorium
Amendment dated as of May 27, 1994 between Agent and Borrowers
(incorporated by reference from Exhibit 10(j) to the Company's Annual
Report, Form 10-K, for the year ended December 31, 1994), Fourth
Moratorium Agreement dated as of August 26, 1994 between Agent and
Borrowers (incorporated by reference from Exhibit 1 to the Company's Form
8-K filed with the Securities and Exchange Commission on September 27,
1994 and dated August 26, 1994), Fifth Moratorium Agreement dated as of
September 30, 1994 between Agent and Borrowers (incorporated by reference
from Exhibit 1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on October 6, 1994 and dated September 30, 1994),
letter agreement dated as of January 31, 1995 between Agent and Borrowers
(incorporated by reference from Exhibit 10(j) to the Company's Annual
Report, Form 10-K, for the year ended December 31, 1994), letter agreement
dated as of February 28, 1995 between Agent and Borrowers (incorporated by
reference from Exhibit 10(j) to the Company's Annual Report, Form 10-K,
for the year ended December 31, 1994), letter agreement dated as of March
31, 1995 between Agent and Borrowers (incorporated by reference from
Exhibit 10(j) to the Company's Annual Report, Form 10-K, for the year
ended December 31, 1994), letter agreement dated as of April 30, 1995
between Agent
-27-
<PAGE>
and Borrowers (incorporated by reference from Exhibit 2 to the Company's
Form 8-K filed with the Securities and Exchange Commission on June 1, 1995
and dated April 30, 1995), letter agreement dated as of July 25, 1995
between Agent and Borrowers (incorporated by reference from Exhibit 2 to
the Company's Form 8-K filed with the Securities and Exchange Commission
on August 4, 1995 and dated July 25, 1995), letter agreement dated as of
December 29, 1995 between Agent and Borrowers (incorporated by reference
from Exhibit 1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on March 5, 1996 and dated December 29, 1995), and
Loan Term-Out Agreement dated as of January 31, 1996 between Agent and
Borrowers (incorporated by reference from Exhibit 2 to the Company's Form
8-K filed with the Securities and Exchange Commission on March 5, 1996 and
dated December 29, 1995).
10(k) Forbearance Agreement dated as of April 6, 1990 between Northwestern
National Life Insurance Company, Farm Bureau Life Insurance Company of
Michigan, F.B. Annuity Company, Farm Bureau Mutual Insurance Company of
Michigan, Atlantic Bank of New York, The Daiwa Bank, Ltd., Shawmut Bank,
N.A., The CIT Group/Equipment Financing, Inc., First Mutual of Boston, and
First NH Bank, N.A., and the Company, Chancellor Fleet Corporation,
Chancellor Acquisition Corporation, Chancellor Asset Management
Corporation, Chancellor Financialease, Inc., Chancellor Credit, Ltd.,
Valmont Financial Corporation and Valmont Credit Corp. (incorporated by
reference from Exhibit 10(k) to the Company's Annual Report, Form 10-K,
for the year ended December 31, 1989).
10(p)*First Refusal Agreement dated as of June 1, 1992 between Bruncor Inc. and
Stephen G. Morison (incorporated by reference from Exhibit 1 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
July 6, 1992 and dated June 23, 1992).
10(q) Specimen of Final Form of Warrant to Purchase Common Stock of Chancellor
Corporation issued by the Company on February 5, 1993 to each of
Northwestern National Life Insurance Company, Farm Bureau Life Insurance
Company of Michigan, F.B. Annuity Company, Farm Bureau Mutual Insurance
Company of Michigan, Atlantic Bank of New York, The Daiwa Bank, Ltd.,
Shawmut Bank, N.A., The CIT Group/Equipment Financing, Inc., Federal
Deposit Insurance Corporation and First NH Bank, N.A. (the "Lenders") in
denominations set forth on Schedule A to Twelfth Amendment and Extension
Agreement dated as of February 5, 1993 between Agent and Borrowers
(incorporated by reference from Exhibit 2 to the Company's Form 8-K filed
with the Securities and Exchange Commission on February 16, 1993 and dated
February 5, 1993); and Modification of Warrant Agreement dated as of March
31, 1993 among the Borrowers and the Lenders (incorporated by reference
from Exhibit 2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on May 27, 1993 and dated May 25, 1993).
10(r) Letter agreement dated as of March 1, 1993 between the Company and Bruncor
Inc. relating to the proposed conversion of certain indebtedness into
Common Stock of the Company under a formula based on the book value of the
Common Stock (incorporated by reference from Exhibit 10(r) to the
Company's Annual Report, Form 10-K, for the year ended December 31, 1992);
and Consent Agreement dated as of March 31, 1993 among the Borrowers, the
Lenders, Bruncor Inc. and The Bank of Nova Scotia (incorporated by
reference from Exhibit 3 to the Company's Form
-28-
<PAGE>
8-K filed with the Securities and Exchange Commission on May 27, 1993 and
dated May 25, 1993).
10(s) Secured Warehouse Loan Agreement dated as of June 9, 1993 between
Chancellor Fleet Corporation and IBJ Schroder Leasing Corporation
(incorporated by reference from Exhibit 3 to the Company's Form 8-K filed
with the Securities and Exchange Commission on July 19, 1993 and dated
June 9, 1993).
10(t) Recapitalization and Stock Purchase Agreement dated as of September 20,
1994 among the Company, Bruncor Inc. and Vestex Corporation (incorporated
by reference from Exhibit 3 to the Company's Form 8-K filed with the
Securities and Exchange Commission on September 27, 1994 and dated August
26, 1994), as amended by Amendment No. 1 (incorporated by reference from
Appendix I to the Company's Proxy Statement dated December 9, 1994), by a
letter agreement dated as of February 28, 1995 among the Company, Bruncor
Inc. and Vestex Corporation (incorporated by reference from Exhibit 10(t)
to the Company's Annual Report, Form 10-K, for the year ended December 31,
1994), and by Amendment No. 3 to Recapitalization and Stock Purchase
Agreement dated as of July 14, 1995 by and among the Company, Bruncor
Inc., and Vestex Corporation (incorporated by reference from Exhibit 1 to
the Company's Form 8-K filed with the Securities and Exchange Commission
on August 4, 1995 and dated July 25, 1995).
10(u)*1994 Stock Option Plan, adopted by the Board of Directors of the Company
on August 12, 1994 and approved by the Stockholders of the Company on
January 20, 1995 (incorporated by reference from Appendix III to the
Company's Proxy Statement dated December 9, 1994).
10(v)*1994 Directors' Stock Option Plan, adopted by the Board of Directors of
the Company on August 12, 1994 and approved by the Stockholders of the
Company on January 20, 1995 (incorporated by reference from Appendix III
to the Company's Proxy Statement dated December 9, 1994).
10(w)*1994 Employee Stock Purchase Plan, adopted by the Board of Directors of
the Company on August 12, 1994 and approved by the Stockholders of the
Company on January 20, 1995 (incorporated by reference from Appendix IV to
the Company's Proxy Statement dated December 9, 1994).
10(x) Interim Voting Agreement dated as if July 25, 1995 among the Company,
Vestex Corporation, Stephen G. Morison and the Company's other employees
and form of Voting Agreement among the Company, Vestex Corporation,
Stephen G. Morison, Bruce M. Dayton and Thomas W. Killilea (incorporated
by reference from Exhibits 4 and 5, respectively, to the Company's Form 8-
K filed with the Securities and Exchange Commission on August 4, 1995 and
dated July 25, 1995).
10(y) $200,000 Subordinated Promissory Note dated as of July 25, 1995 by the
Company in favor of Bruncor Inc. (incorporated by reference from Exhibit 3
to the Company's Form 8-K filed with the Securities and Exchange
Commission on August 4, 1995 and dated July 25, 1995).
-29-
<PAGE>
21 Subsidiaries of the Company
23 Independent Auditors' Consent
___________________
*: Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
(b) Reports on Form 8-K:
On April 21, 1995, the Company filed a Form 8-K dated January 20, 1995
reporting that it had issued a press release that day in which it announced
the Company's financial results for the three and twelve months ended
December 31, 1994. The Company's press release also announced that the
Company had entered into an agreement, effective March 31, 1995, with its
senior lenders amending and extending through May 1, 1995 certain loan and
forbearance agreements originally entered into among the Company, its
affiliates and a group of its senior lenders in April 1990. The Company's
press release also included an announcement that the Company on January 20,
1995 had declared and paid a .475-for-1 Common Stock dividend to
stockholders of record on January 6, 1995.
On June 1, 1995, the Company filed a Form 8-K dated April 30, 1995
reporting that it had issued a press release on May 30, 1995 in which it
announced the Company's financial results for the three months ended March
31, 1995. The Form 8-K further reported, and the Company's press release
also announced, that the Company had entered into an agreement, effective
as of April 30, 1995, with its senior lenders amending and extending
through December 31, 1995 certain loan and forbearance agreements
originally entered into among the Company, its affiliates and a group of
its senior lenders in April 1990.
On August 4, 1995, the Company filed a Form 8-K dated July 25, 1995
reporting that it had issued a press release on July 26, 1995 in which it
announced that it had closed a transaction with Bruncor Inc. and Vestex
Corporation in which Bruncor's 61% majority interest in the Company had
been acquired by Vestex, the Company and the Company's employees. The
Company reported that on July 25, 1995 the Company, Bruncor and Vestex
entered into Amendment No. 3 to Recapitalization and Stock Purchase
Agreement, pursuant to which Bruncor sold all of its 3,870,015 shares of
the Company's Common Stock to Vestex (1,600,000 shares) and the Company
(2,270,015 shares), and that the Company was holding 1,246,276 of the
shares it acquired in treasury and that it distributed 1,023,739 such
shares to its employees. The Form 8-K further reported that Company had
paid Bruncor $542,063.56 ($400,000 of which was provided by Vestex and
$142,063.56 of which was derived from loans to the Company by certain
members of its senior lender group) and issued to Bruncor a $200,000
subordinated note, in consideration for the Common Stock sales described
above and for the release by Bruncor of the Company from approximately $4.4
million of indebtedness arising from a loan from The Bank of Nova Scotia
which was guaranteed by Bruncor. The Form 8-K also indicated that Vestex
had agreed, in addition to the $475,000 it had already paid the Company, to
pay $2,025,000 in installments by
-30-
<PAGE>
December 1, 1995 to acquire 5,000,000 shares of Series A Convertible
Preferred Stock, which would give Vestex a controlling interest in the
Company. The report said that these funds may be borrowed by the Company
prior to the Preferred Stock closing, and thereafter invested, in leased
equipment. The Form 8-K also described an interim voting agreement among
the Company, Stephen G. Morison (the Company's President and Chief
Executive Officer) and Company employees which consolidated voting control
of the former Bruncor shares acquired by Company employees (and, in case of
a default by Vestex by making its Preferred Stock purchase installments,
those acquired by Vestex) in Mr. Morison, as well as a long-term voting
agreement providing for the continuity of certain director representation
and other protections for minority shareholders for a two-year period after
the Preferred Stock purchase. The report disclosed director, executive
officer and 5% shareholder Common Stock beneficial ownership following the
transactions described above and the pro forma beneficial ownership
anticipated following the Preferred Stock purchase. The Form 8-K also
disclosed that J. Paul Allingham and Marks H. Lockhart, who are affiliated
with Bruncor, had resigned from the Company's Board of Directors in
connection with the transactions described above and that Brian M. Adley,
an affiliate of Vestex, had been elected a director.
On August 16, 1995, the Company filed a Form 8-K dated August 15, 1995
reporting that it had issued a press release that day in which it announced
the Company's financial results for the three months and six months ended
June 30, 1995.
On September 27, 1995, the Company filed a Form 8-K dated September 26,
1995 reporting that it had cancelled that certain Recapitalization and
Stock Purchase Agreement dated as of September 20, 1994, as amended, among
the Company, Bruncor Inc. and Vestex Corporation ("Vestex") due to a
default thereunder by Vestex in payment of an installment toward its
purchase of shares of previously authorized Series A Convertible Preferred
Stock. The report indicated that, as a result of Vestex's default, Stephen
G. Morison, the Registrant's President and Chief Executive Officer, has
acquired rights, under the Interim Voting Agreement dated July 25, 1995
among Mr. Morison, Vestex and certain employees of the Company, to direct
the voting of 1,600,000 shares of Common Stock (representing an approximate
31.2% interest in the Company) acquired by Vestex from Bruncor Inc. in a
July 1995 transaction. The report indicated that Mr. Morison consequently
assumed voting power over a total of 2,797,051 shares representing an
approximate 54.6% interest in the Registrant and that Mr. Morison was not
required to pay any amounts in connection with the transfer in voting power
pursuant to the terms of the Interim Voting Agreement.
On November 3, 1995, the Company filed a Form 8-K dated November 2, 1995
reporting that it had issued a press release that day in which it announced
the Company's financial results for the three months and nine months ended
September 30, 1995.
On March 5, 1996, the Company filed a Form 8-K dated December 29, 1995
reporting that it had entered into a letter agreement dated December 29,
1995 with its senior lenders amending and extending through January 31,
1996 certain loan and forbearance agreements among the Company, its
affiliates and a group of its senior lenders in April 1990. The Form 8-K
also reported that the Company had issued a press release on February 6,
1996 announcing that the Company had entered
-31-
<PAGE>
into a Loan Term-Out Agreement dated January 31, 1996 with its senior
lender group, representing the final 20-month term-out of the Company's
senior forborne debt as well as an 11-month extension of the warehouse
financing facility provided by the lender group. The Company's press
release also announced that (a) the Company expected upon the completion of
its 1995 year-end audit to announce a profit for the three months, and a
loss for the 12 months, ended December 31, 1995, and (b) Richard D. Rizzo
had been appointed to the Company's Board of Directors.
-32-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Chancellor Corporation:
We have audited the accompanying consolidated balance sheets of Chancellor
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chancellor
Corporation and its subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has sufferred recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 1, 1996
F - 1
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1995 1994
- ------ ---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 185 $ 79
Cash restricted and escrowed 4,513 5,068
Receivables, net 1,889 1,684
Leased equipment held for underwriting 1,859 2,557
Net investment in direct finance leases 1,421 2,010
Equipment on operating lease (net of accumulated
depreciation of $17,020 and $33,494) 1,683 7,495
Residual values, net 3,340 3,095
Furniture and equipment (net of accumulated
depreciation of $2,453 and $2,421) 179 192
Other assets 1,019 985
--------- ---------
$ 16,088 $ 23,165
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Accounts payable and accrued expenses (including $535
of accrued interest payable to a related party in 1994) $ 6,842 $ 7,756
Indebtedness:
Nonrecourse 3,167 5,205
Recourse 4,314 11,225
Deferred income taxes 400 400
--------- ---------
Total liabilities 14,723 24,586
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock - $.01 par value,
Authorized: 10,000,000 shares;
None issued
Common stock - $.01 par value,
Authorized: 30,000,000 shares;
Issued 6,567,302 and 6,566,712 shares 65 65
Additional paid-in capital 23,638 19,475
Deficit ( 21,802) ( 20,581)
--------- ---------
1,901 ( 1,041)
Less treasury stock - 1,430,911 and
184,635 shares at cost ( 536) ( 380)
--------- ---------
Total stockholders' equity (deficit) 1,365 ( 1,421)
--------- ---------
$16,088 $ 23,165
========= =========
</TABLE>
See notes to consolidated financial statements.
F - 2
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In Thousands Except Per Share and Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 4,391 $ 7,630 $ 12,088
Lease underwriting income 749 499 857
Direct finance lease income 191 260 354
Interest income 72 140 221
Gains from portfolio remarketing 2,242 633 280
Fees from remarketing activities 668 1,160 629
Other income 178 265 481
---------- ---------- ----------
8,491 10,587 14,910
---------- ---------- ----------
Costs and expenses:
Selling, general and administrative 5,239 5,288 6,636
Interest expense 1,041 2,102 2,874
Depreciation and amortization 3,432 6,368 8,508
Lease rental - 163 1,418
Provision for bad debt - - 17
Residual value estimate reductions - - 2,524
---------- ---------- ----------
9,712 13,921 21,977
---------- ---------- ----------
Loss before income tax benefit
(provision) and cumulative effect
of change in accounting principle ( 1,221) ( 3,334) ( 7,067)
Deferred income tax benefit (provision)
(net of state income tax expense
of $29 in 1993) - ( 9) 471
---------- ---------- ----------
Loss before cumulative effect of
change in accounting principle ( 1,221) ( 3,343) ( 6,596)
Cumulative effect of change in
accounting principle - - 600
---------- ---------- ----------
Net loss ($ 1,221) ($ 3,343) ($ 5,996)
========== ========== ==========
Net loss per share before cumulative
effect of change in accounting principle ($ .22) ($ .52) ($1.07)
Cumulative effect of change in
accounting principle - - .10
---------- ---------- ----------
Net loss per share ($ .22) ($ .52) ($ .97)
========== ========== ==========
Weighted average number of
common and common equivalent
shares outstanding 5,634,439 6,373,161 6,173,587
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
--------------------------------------------
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
Additional
Common stock Treasury stock
------------ paid-in --------------
Shares Amount capital Deficit Shares Amount Note receivable
------ ------ ------- ------- ------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 3,989,559 $40 $18,653 ($11,242) 119,700 ($348) ($160)
Exercise of stock options 12,300 - - - - - -
Sale of common stock 3,300 - 3 - - - -
Exchange of note receivable
for treasury stock - - ( 128) - 64,935 ( 32) 160
Conversion of accrued
liability to common stock 498,243 5 967 - - - -
Net loss - - - ( 5,996) - - -
--------- ------ ------- -------- ---------- ----- ---------------
BALANCE, DECEMBER 31, 1993 4,503,402 45 19,495 ( 17,238) 184,635 ( 380) -
Exercise of stock options 8,100 - - - - - -
1.475-for-1 common stock split effected
in the form of a 47.5% stock dividend 2,055,210 20 ( 20) - - - -
Net loss - - - ( 3,343) - - -
--------- ------ ------- -------- ---------- ----- ---------------
BALANCE, DECEMBER 31, 1994 6,566,712 65 19,475 ( 20,581) 184,635 ( 380) -
Capital contribution by related party - - 4,148 - 3,870,015 ( 484) -
Stock purchase by Vestex (net of expenses
of approximately $185) - - 15 - (1,600,000) 200 -
Stock grant - - - - (1,023,739) 128 -
Exercise of stock options 590 - - - - - -
Net loss - - - ( 1,221) - - -
--------- ------ ------- -------- ---------- ----- ---------------
BALANCE, DECEMBER 31, 1995 6,567,302 $65 $23,638 ($21,802) 1,430,911 ($536) -
========= ====== ======= ======== ========== ===== ===============
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994 1993
------------------------ ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 1,221) ($ 3,343) ($ 5,996)
--------- --------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle - - ( 600)
Depreciation and amortization 3,432 6,368 8,508
Provision for bad debt - - 17
Deferred tax benefit - - ( 500)
Compensation expense recognition on stock grant 128 - -
Changes in assets and liabilities:
Receivables ( 205) 954 3,346
Residual values, net ( 245) 1,183 2,620
Other assets ( 34) ( 51) 64
Accounts payable and accrued expenses ( 194) ( 2,204) 411
--------- --------- ---------
Total adjustments 2,882 6,250 13,866
--------- --------- ---------
Net cash provided by operating activities 1,661 2,907 7,870
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leased equipment held for underwriting 698 240 8,597
Net investment in direct finance leases 589 709 1,057
Equipment on operating lease 2,421 3,007 1,902
Net change in cash restricted and escrowed 555 4,048 331
Disposals of (additions to) furniture and equipment, net ( 28) 23 3
--------- --------- ---------
Net cash provided by investing activities 4,235 8,027 11,890
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to indebtedness - nonrecourse 11,797 2,874 5,316
Repayments of indebtedness - nonrecourse ( 13,835) ( 10,059) ( 22,359)
Additions to indebtedness - recourse - - 176
Repayments of indebtedness - recourse ( 3,967) ( 3,844) ( 3,055)
Sale of common stock, net of expenses 215 - 3
--------- --------- ---------
Net cash used for financing activities ( 5,790) ( 11,029) ( 19,919)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 106 ( 95) ( 159)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 79 174 333
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 185 $ 79 $ 174
========= ========= =========
Non-Cash Activity
- -----------------
Capital contribution by a related party in the form of debt forgiveness $ 4,148 $ - $ -
======== ========= =========
Acquisition of treasury stock $ 484 $ - $ -
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A. Business Organization and Significant Accounting Policies:
---------------------------------------------------------
Business -
--------
Chancellor Corporation and subsidiaries (the "Company") are engaged in
originating and selling equipment leasing transactions involving primarily
transportation, material handling, construction and occasionally other
equipment.
Basis of presentation -
---------------------
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the year ended December 31, 1995,
1994, and 1993, the Company incurred net losses of $1,221,000, $3,343,000, and
$5,996,000, respectively. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to comply with the terms and
covenants of its intercreditor and other financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to attain
successful operations.
During 1995 the Company completed certain steps toward improving the
Company's consolidated financial position and liquidity. First, the Company
reached agreement with its lenders which scheduled debt payments through
September 1997 and reduced the interest rate due on the debt balances (see Note
G). Second, the Company completed a recapitalization in July 1995 which restored
the Company to a positive total stockholders' equity. The recapitalization also
eliminated equity raising restrictions imposed by the former majority
shareholder. Third, the Company again narrowed its year-to-year losses in 1995
versus 1994. The Company returned to profitability in the second half of the
year. Fourth, the Company increased its lease underwriting income by 50% in 1995
versus the prior year. Lease underwriting income reflects the level of new
leases generated and therefore establishes the level of remarketing
opportunities the Company expects to have in future years. Management believes
the level of new leases generated is an important indicator of future Fees from
remarketing activities and cash flow.
The Company's Board and management continues to believe that the Company
requires new
F - 6
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
equity capital in order to resume a strategy of portfolio investment which it
had successfully pursued during the late 1980's as well as to invest in certain
remarketing and other business operations. The Board is actively pursuing
raising equity through private investors, including a possible restructured
preferred stock purchase involving Vestex Corporation, a 31% stockholder. In the
event that additional equity capital proves to be unavailable, management's
strategy for the Company would be to reposition it into a services enterprise
with negligible capital requirements and a goal of modest future profitability.
Principles of consolidation -
---------------------------
The consolidated financial statements include accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits and losses have been eliminated in consolidation.
Revenue recognition -
-------------------
Lease underwriting income - Lease underwriting fees arise from the sale of
equipment leasing transactions and include cash underwriting margins and
residual value fees. The excess of the sale price of equipment to an investor
(including the assumption of any non-recourse indebtedness) over its cost to the
Company represents lease underwriting fees. The Company typically arranges for
the lease of equipment to a lessee and, in some cases, for borrowings to finance
the purchase of the equipment, assigning lease rentals to secure such borrowings
on a non-recourse basis. The equipment, subject to the lease and the borrowing
(if any), is then sold to investors using the structure of a grantor trust which
is then managed by the Company. Consideration for the sale of the leased
equipment to investors is normally in the form of a cash investment.
Residual value fees arise from the sale of lease transactions to investors.
These fees represent the Company's present value share of the future residual
value of the leased equipment which the Company expects to realize upon
successful remarketing of the equipment.
Direct finance leases - Lease contracts which qualify as direct finance
leases are accounted for by recording on the balance sheet minimum lease
payments receivable and estimated residual values on leased equipment less
unearned lease income and credit allowances. Revenues from direct finance leases
are recognized as income over the term of the lease, on the basis that produces
a constant rate of return.
Operating leases - Lease contracts which qualify as operating leases are
accounted for by recording the leased equipment as an asset, at cost. The
equipment is then depreciated on a straight-line basis over two to fifteen years
to its estimated residual value. Equipment is further
F - 7
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
depreciated below its initial residual value upon release to its estimated
revised residual value at release expiration. Any changes in depreciable lives
affect the associated expense on a prospective basis. Rental income from
operating leases is recognized using a straight-line method over the initial
term of the lease.
Residual values -
---------------
The Company reviews recorded residual values quarterly and performs a
recoverability study on an annual basis. Writedowns in estimated residual
values, due to declines in equipment value or the financial creditworthiness of
individual customers and major industries into which the Company leases
equipment, are recorded when considered other than temporary.
Initial direct lease costs -
--------------------------
The Company capitalizes and defers initial direct costs incurred in
originating operating and direct finance leases at lease commencement. Initial
direct costs are included in other assets and were amortized over the term of
the leases using a straight-line method. Initial direct costs were fully
amortized as of December 31, 1994.
Cash and cash equivalents -
-------------------------
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
Cash restricted and escrowed -
----------------------------
Restricted and escrowed cash balances are available only for specific
purposes related to payments to investors, payment of taxes related to equipment
owned by investors, debt service payments, and working capital allotments
permitted by the Company's loan agreements.
Leased equipment held for underwriting -
--------------------------------------
Equipment inventories are valued at the lower of cost (specific
identification) or market. Revenues and expenses associated with this equipment
are deferred until the equipment is sold or added to the Company's owned
portfolio.
Furniture and equipment -
-----------------------
Furniture and equipment are recorded at cost. Depreciation is computed
using a straight-line method over 5 years based on the estimated useful lives of
the related assets. Leasehold
F - 8
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
improvements are amortized over the lease term.
Income taxes -
------------
In 1993, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach for financial accounting and reporting for income taxes. In
addition, future tax benefits, such as net operating tax carryforwards, are
recognized to the extent realization of such benefits is more likely than not.
See Note H below ("Income Taxes") for a discussion of the effect of the
implementation of SFAS No. 109 on the Company.
Stockholders' equity (deficit) -
------------------------------
On July 25, 1995, the Company simultaneously completed a recapitalization
of its balance sheet, the sale of 1,600,000 shares of Common Stock to Vestex,
Inc., and an award of 1,023,739 shares of Common Stock to the Company's
employees. The impact of this transaction included the elimination of $720,000
of accrued interest included in accounts payable and $3,494,000 of subordinated
recourse debt; an increase of $4,163,000 of additional paid-in capital; and an
increase in treasury stock of $156,000 (1,246,276 shares), including the
recognition of $128,000 of compensation expense related to the stock grant. This
transaction restored the Company to a positive stockholders' equity balance.
On January 20, 1995, the Company effected a 1.475-for-1 split in the form
of a 47.50% Common Stock dividend. On the same day, the stockholders also
approved an amendment to the Articles of Organization in order to increase the
number of shares of Common Stock from 10,000,000 to 30,000,000 and create
10,000,000 shares of preferred stock ($0.01 par value). Stockholders' equity has
been restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from additional paid-in capital to Common Stock the
par value of the additional shares arising from the split. In addition, all
references in the financial statements to number of shares, per share amounts,
stock option data, and market price of the Company's Common Stock have been
restated. No preferred stock has been issued as of December 31, 1995.
The Company has authorized but not issued 5,000,000 shares of preferred
stock designated as "Series A Convertible Preferred Stock." Each share of Series
A Convertible Preferred Stock is entitled to the number of votes equal to the
number of whole shares of Common Stock into which the shares of Series A
Convertible Preferred Stock held by such holder are then convertible, bears an
annual cumulative dividend of $0.045 per share, and is convertible into the
Company's Common Stock at a price of $0.50 per share, which is adjustable in
accordance with a conversion price formula.
F - 9
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Net loss per share -
------------------
Net loss per share amounts are computed based on the weighted average
number of common and common equivalent shares, when dilutive, which were
outstanding during the period.
Reclassifications -
-----------------
Certain amounts in previous years' consolidated financial statements have
been reclassified to conform with the 1995 presentation.
Supplemental cash flow information -
----------------------------------
Cash paid for income taxes during 1995, 1994 and 1993 was $41,000, $29,000
and $22,000, respectively.
Interest paid during 1995, 1994 and 1993 approximates interest expense.
Other assets -
------------
In connection with the December 1993 amendment to the Company's corporate
office lease, the Company executed a promissory note in favor of its landlord in
the principal amount of $796,510 due January 1999. The note is included in
accounts payable and accrued expenses and a related asset, including a $100,000
security deposit is included in other assets. The security deposit will offset
the note in 1999 provided that the Company does not default on its lease. In the
event of default by the Company under the lease, the security deposit will be
forfeited and the note will be accelerated.
Accounting for estimates -
------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles, by necessity, requires management to make
assumptions regarding estimates reported in these consolidated financial
statements. These estimates primarily include residual values, the useful lives
of fixed assets and deferred income taxes, among others. These assumptions could
change based on future experience and, accordingly, actual results may differ
from these estimates.
New accounting pronouncement -
----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
F - 10
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
the carrying amount of an asset may not be recoverable. SFAS No. 121 is required
to be adopted for fiscal years beginning after December 15, 1995. The Company
does not expect that the adoption of SFAS No. 121 will have a material impact on
the consolidated financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires expanded disclosure of stock-based
compensation arrangements with employees and encourages, but does not require,
application of the "fair value" recognition provisions in the new Statement.
SFAS No. 123 is required to be adopted for fiscal years beginning after December
15, 1995. The Company has not yet determined whether it will change to the
recognition provisions of SFAS No. 123 and has not yet determined the effect
that adopting the new Statement will have on its consolidated financial position
or results of operations.
Fair value of financial instruments -
-----------------------------------
The fair value of the Company's assets and liabilities that constitute
financial instruments as defined in SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments," approximate their recorded amounts.
B. Receivables:
- -- ------------
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
------ ------
(In Thousands)
<S> <C> <C>
Notes receivable $ 37 $ 76
Receivables from trusts 45 442
Accrued rents 287 139
Lease underwriting receivable 1,499 1,022
Other 21 5
------ ------
$ 1,889 $1,684
======= ======
</TABLE>
Notes receivable arise principally from investor equity investments and
obligations to the Company relating to sales of leased equipment.
Receivables from trusts represent amounts due the Company for cash outlays
associated with the remarketing of equipment. These amounts will be collected
upon successful remarketing of such equipment.
Lease underwriting receivable relates to the Company's lease origination,
underwriting and syndication business.
F - 11
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
C. Residual Values:
---------------
The Company's lease underwriting income includes consideration in the
residual value sharing arrangements received from originating and lease
transactions to investors. This type of consideration (residual will be realized
by the Company upon remarketing of the equipment at termination or expiration of
the related leases. The Company's share of expected future residual values is
recorded as income at their discounted present value at the time the underlying
leases are sold to investors. Any increases in the Company's expected residual
sharing are recorded as gains upon realization. Decreases in the Company's
expected residual sharing are recorded as losses at the time such a
determination is made.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Residual values, beginning of year, net $3,095 $ 4,278 $ 5,345
Residual fees recorded 605 316 444
Realization ( 360) (1,499) ( 540)
Residual value estimate reductions - - ( 971)
------ -------- -------
Residual values, end of year, net $3,340 $ 3,095 $ 4,278
====== ======== =======
</TABLE>
Residual value estimate reductions represent reductions in expected future
residual values on certain equipment, the residuals for which were substantially
all recorded prior to 1990. Such reductions resulted from an extensive review
and valuation of all assets owned, leased and managed by the Company. See Note F
for additional information on the review and valuation. For the years ended
December 31, 1995, 1994 and 1993, the Company realized income of approximately
$668,000, $1,160,000 and $629,000, respectively, relating to the remarketing of
equipment for which no residuals were recorded or realized amounts exceeded the
booked residual.
Aggregate residual value fees expected to be realized are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1996 $ 769
1997 786
1998 560
1999 640
2000 293
Thereafter 292
------
$3,340
======
</TABLE>
F - 12
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
D. Net Investment in Direct Finance Leases and Equipment on Operating Lease:
- ------------------------------------------------------------------------
Net investment in direct finance leases consisted of:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---------- ----------
(In Thousands)
<S> <C> <C>
Minimum lease payments receivable $ 1,061 $ 1,536
Estimated unguaranteed residual values of
leased equipment 526 751
Less unearned income ( 166) ( 277)
----------- ----------
$ 1,421 $ 2,010
========== ==========
</TABLE>
The cost of equipment on operating lease by category of equipment is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
(In Thousands)
<S> <C> <C>
Transportation equipment $ 11,814 $18,740
Other equipment 6,889 22,249
--------- ---------
18,703 40,989
Less accumulated depreciation ( 17,020) (33,494)
--------- ---------
$ 1,683 $ 7,495
========= =========
</TABLE>
The aggregate amounts of minimum lease payments to be received from non-
cancelable direct finance and operating leases are as follows:
<TABLE>
<CAPTION>
Direct Finance Operating
-------------- ---------
Year ending December 31: (In Thousands)
<S> <C> <C>
1996 $ 460 $ 497
1997 373 320
1998 175 153
1999 36 21
2000 and thereafter 17 20
------ ------
$1,061 $1,011
====== ======
</TABLE>
During 1993, the Company recorded reductions of approximately $1.5 million
in residual value estimates associated with certain equipment included in the
direct finance lease and operating lease portfolio. No such reductions were
recorded in 1995 or 1994. The reductions resulted from extensive review and
revaluation and are included in residual value estimate reductions on the
Consolidated Statements of Operations for those years. See Note F for specific
information on the
F - 13
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
review and revaluation.
Included in the operating lease and direct finance lease portfolios are
approximately $106,000 and $239,000 of equipment held for remarketing, stated at
net book value, as of December 31, 1995 and 1994, respectively.
E. Accounts Payable and Accrued Expenses:
- - -------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------
1995 1994
------- -------
(In Thousands)
<S> <C> <C>
Trade accounts payable $2,348 $1,102
Payables to trusts 2,712 3,789
Accrued lease rental - 200
Accrued interest payable 24 713
Other 1,758 1,952
------ ------
$ 6,842 $7,756
======= ======
</TABLE>
F. Residual Value Estimate Reductions and Lessee Credit-Related Portfolio
- - ----------------------------------------------------------------------
Losses:
------
The Company performs a review and revaluation of all assets owned, leased
and managed by the Company every year. In 1991, the Company developed a database
which allowed for the first time a comparison of future estimated values with
historical experience according to key valuation criteria, e.g., equipment type
and specifications, age at expiration, mileage and use, and original equipment
cost. In 1992, a review of the year's experience continued to validate the 1991
valuation method.
In 1993, the Company refined its valuation model based on experience which
indicated that sales prices on equipment which was first released and then
subsequently sold were less than prices realized on equivalent aged equipment
sold immediately after its original lease. Further, the Company noted that the
effect of manufacturers' model year changeovers on equipment values was more
important than the equipment's age at lease expiration and changed the valuation
model accordingly, resulting in the fourth quarter 1993 residual reduction of
$1.0 million and $1.5 million reduction in the residual fees, net, and the
direct finance/operating lease portfolios, respectively. The Company believes it
now has sufficient historical experience to estimate future equipment values
within a narrow range, assuming a macroeconomic environment with low inflation
and moderate growth. The Company continues to build a remarketing distribution
system using used truck dealers to supplement the Company's own sales and
telemarketing group. The remarketing operation is generally unaffected by the
Company's financial difficulties.
F - 14
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
In 1994, a review of the year's remarketing experience resulted in an
update of the 1993 valuation method, with the first update occurring for tractor
and trailer additions effective July 1, 1994 and the second for forklift
additions effective October 1, 1994. In 1994 and 1995, this review did not
result in a change in the Company's recorded residual values.
G. Indebtedness:
- - -------------
The Company has four principal sources of financing: (1) an intercreditor
loan, (2) a secured inventory loan, (3) a non-recourse inventory loan facility,
and (4) a subordinated loan.
The intercreditor loan had a balance of $2.3 million as of December 31,
1995. Repayment of the loan is secured by virtually all assets of the Company
not otherwise encumbered. Since April 1990, when the intercreditor loan was
formed through the restructuring of most of the Company's unsecured recourse
debt, the intercreditor loan has been renewed 25 times, most recently in the
form of a Loan Term-Out Agreement entered into on January 31, 1996 for the
period through September 25, 1997 (subject to acceleration on December 31, 1996
if the intercreditor inventory facility described below is not repaid or
refinanced by that date), during which the entire loan balance will be
amortized. During each renewal period, the intercreditor group lenders agreed to
forbear from exercising certain rights under their original individual loan
agreements in exchange for the Company's agreements to (a) make principal and
interest payments as agreed, (b) secure the continued subordination by another
lender, and (c) operate within other covenants typical for this type of
financing, including a prohibition on payment of dividends and restrictions on
capital spending. As of year end 1995, interest rates varied by lender from
11.66% to 15.5%. Since the January 31, 1996 term-out of the loan, the interest
rate is prime plus 2%.
A secured inventory loan of $1.8 million as of December 31, 1995 ($3.0
million as of December 31, 1994) is provided by the same lender group which
provides the intercreditor loan. The facility will expire on December 31, 1996.
This inventory loan is secured by either cash or equipment subject to leases.
This facility allows the Company to purchase equipment subject to a lease before
selling the transaction to an investor. The interest rate was 3.5% above the
prime rate until January 31, 1996. The new rate is prime plus 2%.
The Company also has a non-recourse loan facility which supplements the
secured inventory loan described above. The non-recourse loan facility provides
for the financing of the discounted lease stream and a portion of the residual
value of the equipment subject to those leases. Fundings under this $10 million
facility are subject to the lender's credit approval of the lessee. The interest
rate on amounts borrowed is 2% above the prime rate. At December 31, 1995, $1.3
million was outstanding. The non-recourse loan facility does not include $1.8
million and $4.8 million as of December 31, 1995 and 1994, respectively, of non-
recourse debt which was borrowed in prior years by directly assigning rentals to
the non-recourse lenders. The Company has not required this type of
F - 15
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
financing since 1989 because of the unavailability of capital to finance the
difference between the equipment purchase price and the present value of the
rental stream advanced by the non-recourse lender.
The intercreditor loan ($2.3 million), the secured inventory loan ($1.8
million), and a $200,000 subordinated loan from Bruncor, Inc. together make up
the $4.3 million of recourse debt outstanding at December 31, 1995. Aggregate
annual commitments under recourse debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1996 $ 3,138
1997 976
2000 200
-------
$ 4,314
=======
</TABLE>
In connection with an extension agreement negotiated in February 1993, the
Company granted the lender group warrants to purchase up to 10% of the Common
Stock of the Company (513,639 shares as of December 31, 1995) on a fully diluted
basis for $1.09 per share in consideration of the lenders having accommodated
several loan modifications requested by the Company, including a limited amount
of buy-sell remarketing financing capability. As of December 31, 1995, none of
these warrants have been exercised. The lender group has agreed to surrender 90%
of the warrants if their loans are repaid on or before July 31, 1996.
Maximum amounts of recourse indebtedness outstanding were approximately $11
million, $15 million and $18 million during the years ended December 31, 1995,
1994 and 1993, and the weighted average interest rates were 11.8%, 12.4% and
9.7%, respectively, for these same periods.
Non-recourse indebtedness consists of notes payable to banks and financial
institutions arising from assignments of the Company's rights (most notably the
right to receive rental payments) as lessor at interest rates ranging from 7.5%
to 14%. Amounts due under non-recourse notes are obligations of the Company
which are secured only by the leased equipment and assignments of lease
receivables, with no recourse to any other assets of the Company. The Company is
at risk, however, for the amount of residual value booked on equipment sold to
investors and its net investment in equipment for its own portfolio in the event
of a lessee default.
F - 16
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Aggregate future maturities of non-recourse indebtedness are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1996 $ 1,889
1997 659
1998 353
1999 97
2000 79
Thereafter 90
-------
$ 3,167
=======
</TABLE>
H. Income Taxes:
- - ------------
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - 9,000 29,000
Deferred:
Federal - - ( 425,000)
State - - ( 75,000)
-------- ------- ---------
Total $ - $ 9,000 ($471,000)
======== ======= ==========
</TABLE>
A reconciliation of the rate used for the provision (benefit) for income
taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Tax benefit at statutory rate 34.0% 34.0% 34.0%
Net operating loss carryforward
benefit for which utilization
is not assured ( 34.0) ( 33.7) ( 40.7)
------- ------- --------
Total 0.0% 0.3% ( 6.7%)
======= ======= ========
</TABLE>
The Company files consolidated federal tax returns with all of its
subsidiaries. As of December 31, 1995, the Company has net operating loss
carryforwards of approximately $21.9 million available for tax purposes, which
expire in the years 2001 through 2008. In addition, at December 31, 1995, the
Company has investment tax credit carryforwards for federal purposes available
to offset future taxes of $2.5 million expiring in the years 1997 through 2001.
The July 1995 recapitalization transaction was a greater than 50% change in
ownership for Federal tax purposes. Accordingly, utilization of net operating
loss and tax credit carryforwards will be limited
F - 17
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
in future years.
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes," which significantly changed the method
of accounting for income taxes. The Company adopted SFAS No. 109 on a
prospective basis effective January 1, 1993. The cumulative effect of adopting
SFAS No. 109 on the Company's consolidated financial statements was to increase
income by $600,000 ($.10 per share) for the year ended December 31, 1993.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
Deferred tax liabilities: (In Thousands)
<S> <C> <C>
Differences between book and tax
basis of property $ 2,984 $ 4,420
Other - 36
-------- --------
Total deferred tax liabilities 2,984 4,456
-------- --------
Deferred tax assets:
Accrued lease rents 220 271
Reserves not currently deductible 827 1,033
Net operating loss carryforwards 8,778 10,849
Tax credit carryforwards 2,556 2,541
Other 160 254
-------- --------
Total deferred tax assets 12,541 14,948
Valuation allowance ( 9,957) (10,892)
-------- --------
Net deferred tax liability $ 400 $ 400
======== ========
</TABLE>
All deferred tax liabilities and deferred tax assets (except tax credit
carryforwards) are tax effected at a combined 40% rate for state and federal
taxes. The valuation allowance relates primarily to net operating loss
carryforwards and tax credit carryforwards that will not be realized. The
valuation allowance decreased by $935,000 in 1995 since certain net operating
loss carryforwards were utilized during 1995. For the years ended December 31,
1994 and 1993, the valuation allowance increased by $2,915,000 and $3,415,000,
respectively.
The deferred tax asset is available to offset taxable income in excess of
book income
F - 18
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
generated from the lease portfolio and residual values which are the principal
components of the total deferred tax liabilities of $3 million and $4.4 million
as of December 31, 1995 and 1994, respectively. Because the deferred tax asset
can be used to directly offset the deferred tax liability, the Company has
determined there is no need to provide a full valuation allowance for the
deferred tax asset.
I. Stock Option Plans and Stock Purchase Plan:
- - ------------------------------------------
The Company has three stock option plans: a 1994 Stock Option Plan, a 1994
Directors' Stock Option Plan, and a 1983 Stock Option Plan, which has expired
but under which certain granted options are outstanding. The Company also has a
1994 Employee Stock Purchase Plan. These plans are described below:
1994 Stock Option Plan -
----------------------
The Company's 1994 Stock Option Plan authorizes the granting of incentive
and non-qualified options to employees and officers to purchase a maximum of
1,207,000 shares of the Company's Common Stock. Options are exercisable over a
period not to exceed ten years. This plan was authorized by the Company's
stockholders in January 1995 and all 1,207,000 shares were granted to the
Company's employees in July 1995. Stock option transactions during the year
ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Number of Shares Option Price Per Share
---------------- ----------------------
<S> <C> <C>
Options granted 1,207,000 $.125 to $.18375
Options exercised - -
Options cancelled - -
--------- ----------------
Balance, December 31, 1995 1,207,000 $.125 to $.18375
========= ================
</TABLE>
Except in the event of cancellation and reissuance, no further options may be
granted under this plan and no options were exercisable during the year ended
December 31, 1995. 607,000 of the options vest and become exercisable at $.125
per share on July 25, 1996 and the remaining 600,000 options vest and become
exercisable at $.1875 per share on July 25, 1997. The Company has reserved
1,207,000 shares of Common Stock for all outstanding options under this plan.
1994 Directors' Stock Option Plan -
---------------------------------
The Company's 1994 Directors' Stock Option Plan authorizes the granting of
non-qualified options to non-employee directors to purchase a maximum of 565,000
shares of the Company's Common Stock. Options are exercisable over a period not
to exceed ten years. This plan was authorized by the Company's stockholders in
January 1995. Stock option transactions during the
F - 19
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
year ended December 31, 1995 (there was no activity under this plan prior to
1995) were as follows:
<TABLE>
<CAPTION>
Number of Shares Option Price Per Share
---------------- ----------------------
<S> <C> <C>
Options granted 190,000 $.25 to $.375
Options exercised - -
Options cancelled - -
------- -------------
Balance, December 31, 1995 190,000 $.25 to $.375
======= =============
</TABLE>
As of December 31, 1995, 375,000 options may be granted under this plan, and
options to purchase 95,000 shares of Common Stock at an exercise price of $.25
per share were fully vested and exercisable. An additional 95,000 options
granted under this plan to three directors will become vested and exercisable at
$.375 per share on July 25, 1996. The Company has reserved 565,000 shares of
Common Stock for all outstanding options under this plan.
Expired Stock Option Plan -
-------------------------
The Company's 1983 Stock Option Plan, which authorized the granting of
incentive and non-qualified options to employees and officers to purchase a
maximum of 1,100,500 shares of the Company's Common Stock, expired prior to the
year beginning January 1, 1995. Options which were granted under this plan and
which have not expired or been terminated are exercisable over a period not to
exceed 10 years. Stock option transactions during the years ended December 31,
1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Number of Shares Option Price Per Share
----------------- ----------------------
<S> <C> <C>
Balance, January 1, 1993 262,311 $.007 to $5.93
Options granted 269,851 .007 to 1.02
Options exercised ( 18,143) .007
Options canceled (119,605) .007 to 5.93
-------- --------------
Balance, December 31, 1993 394,414 .007 to 5.93
Options granted - -
Options exercised ( 11,948) .007
Options canceled ( 24,496) .007 to 3.05
-------- --------------
Balance, December 31, 1994 357,970 .007 to 5.93
Options granted - -
Options exercised ( 590) .007
Options canceled (353,399) .007 to 1.02
-------- --------------
Balance, December 31, 1995 3,981 $.007
======== ==============
</TABLE>
As of December 31, 1995, no further options may be granted under the plan
due to its expiration during 1994, and options to purchase 3,981 shares at an
average exercise price of $.007
F - 20
<PAGE>
CHANCELLOR CORPORATION AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
per share were fully vested and exercisable. The Company has reserved 3,981
shares of Common Stock for all outstanding options under this plan.
Employee Stock Purchase Plan -
----------------------------
The Company's 1994 Employee Stock Purchase Plan authorizes the offering to
employees of up to 250,000 shares of Common Stock in six semiannual offerings at
a price of 85% of the Common Stock's bid price and in an amount determined by a
formula based on each employee's estimated annual compensation. This plan was
authorized by the Company's stockholders in January 1995. No shares of Common
Stock were offered pursuant to the plan during the year ended December 31, 1995.
The Company has reserved 250,000 shares of Common Stock for all amounts which
may be offered to employees under this plan.
J. Commitments and Contingencies:
- - -----------------------------
The Company rents its corporate offices under a ten-year non-cancelable
lease. The future minimum rental commitments are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1996 $353
1997 353
1998 353
1999 29
</TABLE>
Rental expense for the years ended December 31, 1995, 1994 and 1993
amounted to $247,000, $287,000 and $379,000, respectively.
In connection with the December 1993 amendment to the Company's corporate
office lease, the Company executed a promissory note in favor of its landlord,
Aetna Casualty and Surety Company, in the principal amount of $796,510 due
January 1999. The note, which does not bear interest, will be fully canceled if
the Company fulfills its remaining lease obligations without default. If the
Company defaults under the lease, the note will be accelerated and a $100,000
security deposit will be forfeited. The note is included in accounts payable and
accrued expenses.
In the normal course of its business, the Company is from time to time
subject to litigation. Management does not expect that the outcome of any of
these actions will have a material adverse impact on the Company's consolidated
financial position or results of operations.
F - 21
<PAGE>
K. Major Customers:
- - ---------------
The Company is engaged principally in originating and selling equipment
leasing transactions. During 1995, 41%, 15% and 12% (based on original equipment
cost) of the new lease transactions originated by the Company were with the
three largest lessees. In addition, approximately 24%, 17% and 16% (based on
original equipment cost) of equipment sold to investors in 1995 were purchased
by the three largest investors. During 1994, 36%, 12% and 12% (based on original
equipment cost) of the new lease transactions originated by the Company were
with the three largest lessees. In addition, approximately 27%, 23% and 19%
(based on original equipment cost) of equipment sold to investors in 1994 were
purchased by the three largest investors. During 1993, 33%, 27% and 21% (based
on original equipment cost) of new lease transactions originated by the Company
were with the three largest lessees. In addition, approximately 25%, 13% and 12%
(based on original equipment cost) of equipment sold to investors was purchased
by the three largest investors.
L. Employee Benefit Plan:
- - ---------------------
The Company sponsors a 401(k) retirement plan (the "Plan") for the benefit
of its employees. The Plan enables employees to contribute up to 15% of their
annual compensation. The Company's contributions to the Plan amounted to
approximately $18,000, $19,000 and $12,000 in 1995, 1994 and 1993, respectively.
F - 22
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHANCELLOR CORPORATION
Dated: April 1, 1996
By: /s/ Stephen G. Morison
-------------------------------------------
Stephen G. Morison
Vice Chairman of the Board, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: April 1, 1996 /s/ Bruce M. Dayton
---------------------------------------------------
Bruce M. Dayton
Chairman of the Board and Director
Dated: April 1, 1996 /s/ Stephen G. Morison
---------------------------------------------------
Stephen G. Morison
Vice Chairman of the Board, President,
Chief Executive Officer and Director
Dated: April 1, 1996 /s/ Brian M. Adley
---------------------------------------------------
Brian M. Adley
Director
<PAGE>
Dated: April 1, 1996 /s/ Thomas W. Killilea
---------------------------------------------------
Thomas W. Killilea
Director
Dated: April 1, 1996 /s/ Richard D. Rizzo
----------------------------------------------
Richard D. Rizzo
Director
Dated: April 1, 1996 /s/ William J. Guthlein
---------------------------------------------------
William J. Guthlein
Vice President, Chief Financial Officer and
Treasurer
<PAGE>
Exhibit 21
SUBSIDIARIES
Incorporated in Massachusetts:
Chancellor Asset Corporation
Chancellor DataComm, Inc.
Chancellor Financialease, Inc.
Chancellor Financial Sales & Services, Inc.
Chancellor Fleet Corporation
Chancellor Fleet Remarketing, Inc.
Incorporated in Nebraska:
Valmont Financial Corporation
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Chancellor Corporation
We consent to the incorporation by reference in Registration Statements Nos. 2-
97816 and 33-8656 of Chancellor Corporation on Form S-8, as amended, of our
report dated April 1, 1996 (which expresses an unqualified opinion and includes
an explanatory paragraph relating to the Company's ability to continue as a
going concern) appearing in this Annual Report on Form 10-K of Chancellor
Corporation for the year ended December 31, 1995.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 1, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<CASH> 185 79
<SECURITIES> 0 0
<RECEIVABLES> 1,889 1,684
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 179 192
<DEPRECIATION> 20,498 35,915
<TOTAL-ASSETS> 16,088 23,165
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 1,365 (1,421)
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 16,088 23,165
<SALES> 0 0
<TOTAL-REVENUES> 8,491 10,587
<CGS> 0 0
<TOTAL-COSTS> 9,712 13,921
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,041 2,102
<INCOME-PRETAX> (1,221) (3,334)
<INCOME-TAX> 0 9
<INCOME-CONTINUING> (1,221) (3,334)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,221) (3,343)
<EPS-PRIMARY> (.22) (.52)
<EPS-DILUTED> (.22) (.52)
</TABLE>
